South Africa can go from zero to hero
South Africa’s economic growth rate could triple in the next five years if the government continues the reform agenda and allows greater private sector participation.
The government, pre-election, had implemented a range of reforms to increase private sector participation in key sectors of the South African economy.
Chief among these was the electricity, which the government deregulated to encourage private energy generation. Since then, the private sector has poured billions into electricity generation and helped greatly reduce load-shedding.
The government aims to do the same in logistics and has begun to transform some of its container ports and harbours.
Transnet has also released its Network Statement, inviting the private sector to apply for leases to run some of its most important rail corridors.
The initial success of these reforms and their positive impact on the economy has spurred the government to increase the scope of these reforms.
“The election came at a critical time when the government had embarked on this reform process, but it was still fragile,” Stanlib chief economist Kevin Lings said.
Lings said investors were gripped by fear that these reforms would be scuppered in a post-election environment and all progress lost.
However, creating a Government of National Unity (GNU), with the DA being a dominant player alongside the ANC, has boosted sentiment in the private sector.
The GNU has emboldened the private sector and boosted hopes for continued reform, with financial markets responding emphatically to positive political developments.
Lings cautioned that this optimism is predicated on reforms not only continuing but accelerating and perhaps even deepening in other areas of the economy.
“We still have a nervousness about whether this government will hold together. So there are still quite a lot of risks associated with it,” he said.
“We have got to see how this progresses, whether the government seems reasonable, and if the new government manages to work together.”
However, if the reforms continue and the government accelerates the implementation of good policy, the South African economy can boom.
“If all that happens, you are going to see an upward revision to growth, an upward revision to fixed investment in infrastructure and see South African corporates invest in the country,” Lings said.
“It is entirely feasible that we are able to lift South Africa’s growth closer to 4% on a five-year basis. This won’t be instantaneous but will provide encouragement.”
Lings’ sentiment echoes that of other economists, such as FNB’s Siphamandla Mkhwanazi, who said it is incorrect to think what happens in financial markets does not affect the ordinary person.
Mkhwanazi said a reformist government committed to increasing private participation in the economy would create a virtuous cycle that boosts economic growth and brings inflation down.
He explained that creating a GNU has given investors greater certainty that reforms will continue and the private sector will play a greater economic role.
For example, reforms in the electricity sector have proven to be highly effective, with South Africa experiencing over 100 days without load-shedding for the first time since 2020.
This will ease inflation by reducing the cost of doing business in the country and encourage investment in the economy.
Mkhwanazi said these benefits are currently hard to see, with only the financial markets giving an indication that sentiment towards South Africa is changing.
A common error is made here by South Africans. Many think the financial markets are not linked to the broader economy and do not affect the ordinary ‘man on the street’.
Firstly, improved investor confidence brings with it increased inflows into local assets, which boosts their prices and aids wealth creation.
As asset prices continue to appreciate, South Africans’ retirement savings will benefit along with any other investments.
More importantly for the country, the value of the rand is boosted by increased inflows into local assets as demand for rand-denominated bonds and stocks rises.
A stronger rand significantly reduces headline inflation in South Africa as the country imports many basic necessities – particularly fuel.
Mkhwanazi said a stronger rand will drive down the price of oil in rand terms, making it cheaper to import and thus reducing the price at the pump.
Mkhwanazi said this will enable the Reserve Bank to begin cutting rates soon. It is most likely to begin its cutting cycle in September but may start as early as its next meeting this month.
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