While South Africa's real gross domestic product (GDP) growth expanded above consensus forecasts in the first quarter of this year, fading base effects, persistent structural constraints and the impact of Russia's invasion of Ukraine will result in growth slowing across the rest of the year, market and credit intelligence company Fitch Solutions Country Risk & Industry Research sub-Saharan Africa country risk analyst Lara Wolfe noted this week.

Elevated inflation and the poor labour market in the country will also cap real GDP gains, which are expected to slow to 1.7% for the year, well below the regional average of 3.2%.

Recently released data showed that real GDP came in above consensus, expanding 2.6% in the first quarter, she pointed out during a webinar on July 13.

"Inflation reached 6.5%, breaching the South African Reserve Bank's (SARB's) upper limit. Russia's invasion of Ukraine has increased food and fuel prices. Fuel price pressures will be compounded by ongoing supply chain challenges, arising both from the global dislocation and the impact of severe flooding in the second quarter, particularly on the economically important Port of Durban," Wolfe said.

As a result of growing inflation pressure and, given the hawkish stance of the US Federal Reserve Bank, Fitch Solutions expects the SARB to hike interest rates by a further 125 basis points to 6% before the end of the year.

This will raise the cost of borrowing for households and businesses and will weigh on growth across the rest of the year.

Government consumption and private investments will, however, provide some growth tailwinds, she added.

The company also forecasts that the rand will weaken this year from an average of R14 to the dollar in 2021 to an average of R15.80, largely owing to domestic headwinds, including the impact of the severe flooding in KwaZulu-Natal, a significant uptick in load-shedding and uncertainty owing to corruption allegations levelled against President Cyril Ramaphosa, as well as general global risk-off sentiment, Wolfe said.

"We expect prices of key exports, such as gold and platinum, to remain relatively strong and to contribute to a trade account surplus and currency flows. This will be offset by high oil prices, which is a key South African import," she said.

Meanwhile, South Africa's purchasing managers index (PMI) moderated to 52.2 in June. The PMI stayed above 50 for the eleventh consecutive month, which signals 11 months of expansion in the manufacturing sector.

"While structural constraints, such as continued load-shedding, will offer some headwinds, particularly in key sectors such as the mining sector, reconstruction work from the April floods will spur investment," said Wolfe.

Further, while revenue in South Africa was 13.7% higher in January to April than in the year-earlier period, likely reflecting a rise in corporate income taxes owing to high commodity prices and a favourable ratio of export to import prices, the government expects the consolidated fiscal deficit to widen from an estimated 5.7% of GDP in the 2021/22 financial year to 6% in the 2022/23 financial year, as commodity-price revenue windfalls moderate and spending pressures remain elevated.

Prices for South Africa’s key commodity exports, such as gold, platinum and palladium, which collectively made up 24.7% of South African exports in 2021, have outperformed Fitch Solutions' expectations.

Further, the SARB began its hiking cycle earlier than most other emerging markets, and maintains a significant interest rate differential with the US despite the Fed’s 75 basis point hike to 1.75% in June.

Thus, while poor domestic fundamentals have continued to exert downward pressure on the rand, the currency has only depreciated by 0.9% since the start of the year, Wolfe said.