South Africa’s Inflation Recedes, but Financial Stability Risks Remain Elevated

Date: January 10, 2023

Cape Town - South Africa’s inflation rate has receded to even lower levels from the beginning of the second half of the year, settling at 3.5 percent by September 2023. However, projections indicate that inflation expectations for the entirety of 2023 remain elevated, standing at 5.9 percent.

Inflation Risks Remain Elevated

According to the Financial Stability Report released by the South African Reserve Bank (SARB), upside risks to inflation remain, primarily associated with:

Depreciation of the rand
Higher levels of global prices
Electricity price hikes
Instances of load shedding
Tightness of global oil markets

Intensified Financial Stability Risks

The report highlights intensified financial stability risks, driven by:

Escalating capital outflows
Declining market depth and liquidity
Interconnection between the sovereign and banking sectors
Domestic financial institutions’ reliance on buy-and-hold investment strategies
Waning foreign investor participation

Public Debt Ratio Worsens

Estimates of the public debt ratio in SA worsened, with projections indicating a continuous increase and peaking at 73.6 percent of GDP by fiscal year 2025/26.

Recommendations

To mitigate these risks, the SARB recommends:

Exploring alternative energy sources before the power purchasing agreement expires in 2025
Ring-fencing Eswatini banks against potential risks from SA
Exploring other sources of revenue with increased urgency
Focusing on growing the local stock exchange to provide viable alternatives to the JSE

Key Takeaways

Inflation rate recedes to 3.5 percent in September 2023
Inflation expectations remain elevated at 5.9 percent for 2023
Upside risks to inflation persist, driven by currency depreciation and global price increases
Financial stability risks intensify due to capital outflows and declining market depth
Public debt ratio worsens, peaking at 73.6 percent of GDP in 2025/26