A health care worker holds a Vile of Pfizer vaccine to be given to the elderly at Bertha Gxowa Hospital in Germiston on May 17, 2021.

Michele Spatari | AFP | Getty Images

Economic activity in South Africa has recovered faster than expected in recent months and the rand has been the strongest performing currency in emerging markets this year. However, the country is racing to introduce Covid-19 vaccines when a third wave emerges.

In its financial stability review on Thursday, the South African Reserve Bank said the economy was continuing to recover from a 2020 recession that saw gross domestic product shrink 7%, the sharpest decline in over a century.

“Positive data releases, an increase in global economic activity, robust international trade, increased commodity prices and improved mobility” prompted NKC African Economics to revise its GDP forecast for the first quarter from a previous forecast of 3.3% to 1.4% per quarter to increase% contraction. NKC analysts now expect GDP growth of 3.1% in 2021.

The industrial sector, particularly mining and manufacturing, recorded positive growth rates due to increased global demand and high raw material prices

“Google mobility data, which has proven to be a good indicator of economic activity, has improved to the best level since the coronavirus shock hit,” NKC senior economist Pieter du Preez said in a press release on Wednesday.

Third wave risks

The major credit rating agencies reiterated all of their ratings for South Africa last week, but Fitch noted that although household accounts were positively surprised in both Q4 2020 and Q1 2021, the country is still exposed to “significant risks” Debt stabilization. “

S&P also highlighted structural complaints, a lack of economic reforms and a sluggish vaccination campaign as barriers to medium-term growth potential.

Despite positive surprises so far, the SARB warned that the outlook continues to depend heavily on the pace of vaccine adoption and the possible recurrence of the virus, suggesting the pandemic could last through 2022.

To date, the country has reported a total of over 1.6 million Covid cases and more than 56,000 deaths, according to Johns Hopkins University.

Now the seven-day moving average of daily new cases in South Africa has risen from around 780 in early April to over 3,700 at the end of last week.

Given the magnitude of the previous impact on economic activity, the government appears unwilling to reintroduce strict virus restrictions, despite President Cyril Ramaphosa meeting with the country’s coronavirus task force this week to discuss possible strategies.

South African President Cyril Ramaphosa visits coronavirus disease (COVID-19) treatment facilities at NASREC Expo Center in Johannesburg, South Africa, on April 24, 2020.

Jerome Delay | Reuters

South Africa has started working towards its goal of vaccinating 5 million seniors by the end of June and 67% of its 60 million population by February. The country has purchased 30 million doses of Pfizer BioNTech vaccine and ordered 31 million doses of the vaccine from Johnson & Johnson, both of which have been shown to be effective against the dominant variant circulating in the country.

The central bank also pointed out the risks of a sudden shift in the global financial situation and the persistently “high and rising national debt” in South Africa.

NKC’s Du Preez said the upcoming third wave of Covid-19 will disrupt the economic recovery process. Meanwhile, the government is embroiled in lengthy negotiations with the unions to freeze public sector wages, which, according to du Preez, is also negative for the economic outlook.

“The national treasury would either be forced to re-prioritize spending or over-spend on an already large budget deficit,” he said.

“Re-prioritizing spending would mean cutting funding for critical sectors of the economy or reducing urgently needed infrastructure upgrades.”

The Treasury Department is therefore “between a rock and a hard place,” added du Preez, as excessive spending could send a signal that the authorities are not taking fiscal consolidation seriously.

Roaring edge

Any sign of waning commitment to these austerity measures would put pressure on the fringes, said Jason Tuvey, senior emerging market economist with Capital Economics, in a recent statement.

The rand has risen on higher metal prices and was trading at around 13.76 against the dollar on Monday morning.

However, analysts at Capital Economics said in a statement Thursday that “The Rand’s star performance is unlikely to last as we expect most commodity prices to fall and long-term US yields to rise again, which is the case EM again puts pressure on currencies. “

“In addition, we believe that the SARB will not tighten policy as quickly as investors are now, and that fiscal concerns in South Africa will re-emerge at some point.”

Capital Economics expects the rand to weaken to around 15.5 against the dollar by the end of the year.