Positive turn for South Africa

There is cautious optimism for South Africa’s economy in 2025, with improved inflation dynamics, interest from foreign investors, and potential long-term growth. However, there are still still faces plenty of challenges.

This was explained by Sisamkele Kobus, fixed income analyst at Ninety One, on the Investment Perspective podcast.

Optimism hasn’t often been associated with discussions about the South African economy in recent years. However, Kobus said that since the start of 2024, there appears to have been a shift.

She explained that South Africa appears to be on a much better footing after the formation of the Government of National Unity (GNU) in 2024.

The country is now better positioned to implement improved policies that could lead to stronger economic growth.

The formation of the GNU has also led to increased interest from foreign investors over the last year, although this hasn’t translated to significant capital inflows yet.

“By interest, I don’t mean players in the market, so it’s not like massive flows are coming in, but we’ve had a lot of roadshows where foreign investors will want to come see South Africa.”

According to Kobus, these investors are likely doing their due diligence to see whether the narrative of a “new dawn” under the GNU will result in real, positive economic outcomes.

If South Africa plays its card right, though, there could be a significant capital inflow into the country.

In addition to the GNU, South Africa’s inflation dynamics have significantly improved compared to the challenging conditions of 2022 and 2023.

By 2024, cost-of-living increases have become much more manageable, contributing to a more optimistic economic outlook.

South Africa’s inflation remains within the South African Reserve Bank’s Monetary Policy Committee’s target range of 3–6%. The question now is whether inflation will stay below the 4.5% midpoint.

Kobus explained that recent developments on the inflation front have been promising.

Headline inflation was expected to be 3.2% and core inflation 3.8%, but both figures came in 20 basis points lower than anticipated, with headline inflation at 3% and core inflation at 3.6%.

This positive outcome was primarily driven by a decline in food prices, mirroring trends seen in November when headline inflation stood at 2.9% instead of the projected 3.1%.

Core inflation, in particular, benefited from lower-than-expected increases in rent and owners’ equivalent rent (OER) on a month-to-month basis.

These factors contributed to relatively stable inflation outcomes over the past few months. She noted that inflation is expected to hover between 3% and 3.5% for the next few months.

However, by the second half of the year, it is likely to climb closer to 4%, eventually nearing 4.5% by year-end.

“That’s because we start seeing those sticky administered prices that South Africa is famous for coming through in the middle of the year,” Kobus said.

One key factor to watch is the impending decision by NERSA on Eskom’s request for a 36% electricity price increase, which has been widely criticised.

For now, though, inflation is expected to remain relatively contained in the 3% to 3.5% range. However, despite positive developments, South Africa still faces challenges.

Challenges ahead

Where GDP and unemployment are concerned, the country has had “quite anaemic growth”, with expectations for 2024 still hovering at around 0.6%, Kobus said.

The agriculture sector, in particular, experienced a sharp contraction in the third quarter of 2023, which is currently under review by industry stakeholders and Statistics South Africa to understand the underlying causes.

Even with some optimism surrounding adjustments to the agricultural data, overall growth is forecast to remain below 1% for the year.

“Going into this year, our growth expectation is still conservative versus what we’ve seen. We’re thinking around 1.7% for 2025 from the weakness we saw in 2024,” she explained.

However, while this is an improvement, it is barely above population growth, which has ranged between 1.16 % and 1.64% over the past decade.

“So we’re not growing on a GDP per capita basis, and we’re not creating the jobs that we need at this stage.”

“We’re slightly optimistic that when policymakers are focusing on reforms and getting that private participation in the rest of the network industry in the same manner that they have with energy, we’ll start to see results.

“But growth is a long-term game, so we will those results more in the medium term than instantaneously.”

Another challenge South Africa faces is that emerging market currencies like the rand are especially vulnerable to global trends, including the strength of the US dollar, which has benefited from policies under leaders like Donald Trump.

The South African Reserve Bank has been closely monitoring the rand’s movements.

At the end of December, the consensus was that there would be cumulative interest rate cuts amounting to 100 basis points, with an additional 50 basis points expected from the Reserve Bank.

However, by the beginning of the year, this outlook became less certain due to the rand’s significant weakness and rising oil prices. These were key risks flagged by the Reserve Bank during its November Monetary Policy Committee (MPC) meeting.

Despite the risks associated with a weaker rand, early conversations with an MPC member suggested a more balanced outlook for the currency.

It was indicated that the rand’s performance could mirror the pattern observed between 2017 and 2019, which was characterised by periods of both weakness and strength rather than a consistent downward trend.

This assessment aligns with the rand’s behaviour in the first few weeks of this year.

The year began with a weak currency, but it has since strengthened to around R18.30 to the dollar, compared to R19 just a few weeks prior.

Consequently, inflation expectations now factor in a more range-bound trajectory for the rand, with fluctuations rather than a consistent weakening trend.

This stability may help mitigate the inflationary pressures typically associated with currency depreciation.