The already gloomy sentiment of South African business leaders is falling even further, hitting a three-year low in the second quarter as unrelenting load shedding, rising interest rates, the weak rand and the country's geopolitical quagmires weighed on confidence.

Rand Merchant Bank (RMB) and the Bureau for Economic Research's Business Confidence Index (BCI) declined for the fifth consecutive quarter, reaching 27 in the second quarter of 2023 – its lowest level since 2020. This is a decline of nine points from 36 in the first quarter.

The survey, which covers 1 050 senior executives in the building, manufacturing, retail, wholesale, and motor trade sectors, was carried out between 10 and 30 May.

"Comments by respondents through the different sectors flagged load shedding as a continued drag on sentiment as it hurts production capacity, increases costs, and negatively affects profitability. As such, respondents highlight that any available capital is going towards load-shedding mitigation measures (such as the installation of solar power) rather than investment to build additional capacity," RMB said.

"Some respondents also mentioned the weak rand exchange rate and concerns about South Africa’s diplomatic relations with the rest of the world and its possible impact on trade relations. The increased interest rate environment, while inflation remains elevated, is also a challenge, according to the survey."

The rand hit a record low of R19.91 to the dollar last week after the government's decision to provide diplomatic immunity to Russian delegates at the Brazil, Russia, India, China, and South Africa (BRICS) summit in August. South Africa (SA) is dealing with the legal ramifications should Russian President Vladimir Putin attend, as the International Criminal Court (ICC) has issued a warrant of arrest for him. The currency also fell after accusations that Russia received arms in SA and in the wake of the South African Reserve Bank's warning about the potential threat of sanctions due to the country's stance on Russia.

In terms of the BCI, the consumer-facing new vehicle dealers and retail sector experienced the most notable deteriorations in confidence, plunging by 21 points and 14 points respectively. Respondents in the manufacturing sector were still downbeat, with confidence staying at 17 points, meaning that less than two out of 10 businesspeople in the sector were satisfied with the current business conditions.

RMB chief economist Isaah Mhlanga said it was unclear whether confidence will lift in the short-term since load shedding is expected to worsen over winter.  

"Indeed, while just skirting a recession in the first quarter of 2023, the South African economy is far from being out of the woods. Indeed, more concerning is the fact that consecutive quarters of business confidence below 30 has historically coincided with contractions in either fixed investment, economic growth, or both," he said.

"However, some of the drivers of negative sentiment such as strained geo-diplomacy could be resolved in the coming months while current constraints on business conditions such as load-shedding could look somewhat better in 2024 and may support an improvement in confidence over time."