South Africa can go from black sheep to bull

South Africa has faced years of weak economic growth, and even though it is expected to continue, the country could finally see a turnaround this year.

This is feedback from Investec chief investment strategist Chris Holdsworth, who spoke on the No Ordinary Wednesday podcast with Investec chief economist Annabel Bishop.

Bishop explained that South Africa has come from a particularly weak period, with economic growth projected to reach around 0.5%.

“What we are experiencing at the moment has been a very weak economy for the past several years and the expectation that it’ll carry on being weak,” Bishop said.

“That, of course, hurts business confidence, which is still depressed. However, there’s been a lot of progress made, and I think that’s probably what you feel is behind the scenes.”

In particular, she pointed out that South Africa has made strides in addressing the country’s electricity disaster.

Although this progress has not yet shown up in economic growth, Bishop explained that this could soon change.

“The upside will come when businesses start to realise government has actually delivered more than expected.”

For example, in last year’s State of the Nation Address (SONA), the government promised that they would end the electricity crisis very soon.

While this was initially met with scepticism, it was precisely what happened. The last instance of load-shedding in 2024 was in May, and did not return until recent repairs had to be made.

In this year’s SONA, the government spoke about ending the freight crisis quite soon, Bishop said.

“So all of those factors would start to build towards supporting growth.”

“President Ramaphosa said that the weakness of the freight sector subtracts 3% from economic growth.”

That means that without this drag, South Africa should really be looking at growth closer to 3.5 to 4%, she explained.

“That would be very surprising for investors, for the business community, for the credit rating agencies.”

According to Holdsworth, this creates an opportunity for South Africa.

“The defining characteristic of the past couple of years has been weak growth in South Africa, and that’s led to expectations that growth will continue to be weak despite some of the improvements in the background,” Holdsworth said. “Therein lies an opportunity.”

The consensus forecast for growth this year is between 1.5% and 1.7%, he noted. The projected growth for 2026 isn’t much higher, with IMF’s figure sitting at 1.4% y/y, and Investec’s sitting at 2%.

“That puts South Africa in the bottom 20% of countries across the globe, and it shouldn’t be hard to beat that.”

“So even if we see a modest improvement, we are likely to see numbers that come out in excess of expectations.”

“I think that’s sort of what we’re waiting for. You don’t have to do a lot to be able to beat what we think are close to rock bottom expectations for the SA economy.”

For example, South Africa’s debt-to-GDP ratio is projected to be between 75% and 77%, while S&P estimates it at 80%, Holdsworth said.

This means that all the Treasury needs to do is deliver roughly what their Medium-Term Budget Policy Statement (MTBPS) forecast provided.

“In that environment, we would expect to see the potential for an upgrade even without improving numbers if they just stay in the status quo because the expectation is for a deterioration.”

A rating upgrade would lower the cost of capital, making borrowing cheaper and encouraging economic growth.

Essentially, if South Africa can stabilise its financial position – rather than letting it worsen – it could see positive momentum. This would be further supported by interest rate cuts and other economic factors.

On top of this, if South Africa manages to avoid deteriorating, it will also see improved investor confidence, even without improving its current position.

“If we present numbers that are better than the rating agencies expect, even though they might be in line with what they were before, that would present it as an opportunity,” Holdsworth said.