One thing South Africa must get right for a miracle

With South Africa now on a healthier fiscal path and headed for an economic rebound, the country must turn its attention toward achieving job-rich growth.

This will entail increased fixed capital formation and a reduction in the cost of capital, encouraging local private sector players to invest in South Africa’s economy.

This is feedback from NWU Business School economist Professor Raymond Parsons, whose comments come after the announcement of South Africa’s latest interest rate cut.

On Thursday, 20 November, the Reserve Bank’s Monetary Policy Committee (MPC) voted to cut South Africa’s interest rates by 25 basis points.

This decision, made on the back of a new inflation target and balanced risks to the inflation outlook, has been welcomed by the market.

Parsons, too, supported the MPC’s decision, saying it was the right choice in light of a number of recent favourable financial developments in South Africa.

Finance Minister Enoch Godongwana’s recent “mini-budget” showed that South Africa is on a far healthier fiscal path, and S&P Global validated this by upgrading the country’s rating for the first time in over two decades.

South Africa is on track to achieve a fiscal miracle, recovering from the brink of a debt trap in a stagnant economy, thanks to the National Treasury’s policy of fiscal consolidation bearing fruit. 

Coupled with the official announcement of a lower inflation target, South Africa could be entering a virtuous cycle it has not experienced since the mid-2000s.

Parsons said this monetary policy now needs to be supportive of this incipient economic upturn, pointing out that even with the latest cut, South Africa’s real interest rates remain relatively high by global standards.

“Job-rich growth is now the high priority. The steadier growth outlook outlined by the MPC statement is being mainly driven by higher consumer spending, with fixed capital formation still lagging,” he said. 

In announcing the interest rate cut on Thursday, Reserve Bank Governor Lesetja Kganyago said the MPC has also revised its 2025 growth forecast slightly higher, to 1.3%.

Kganyago added that the committee continues to see growth nearing 2% over the forecast horizon.

Headed for a miracle

Parsons explained that, to achieve higher growth and an economic rebound, increasing fixed capital formation is critical.

To do this, South Africa must reduce the cost of capital. South African corporates have an estimated R1.8 trillion cash pile currently sitting on the sidelines, which can be deployed into the economy if properly incentivised.

“In the coming year, a sufficient number of firms must feel that economic and political factors justify their fresh plans for expansion,” Parsons explained. 

Fixed capital formation has often been touted as the key to unlocking South Africa’s potential growth, but has been neglected in recent years.

From 1994 to 2008, South Africa’s total capital investment ramped up steadily to reach a peak of 23.3% of GDP at the end of 2008.

Over this period, there was steady growth across all of the country’s economic sectors, but the private sector accounted for almost 16% of the total.

However, since this peak, there has been a steady decline in private sector investment in South Africa, with it slowing to below 10%.

South Africa’s total fixed capital formation, which includes public and private sector investments, has been stagnant at around 15%.

For context, in healthy and developed economies like the United States, fixed investment would usually make up around 25% of GDP. 

One of the major reasons for the private sector’s hesitance to invest in South Africa’s economy for the long term is a lack of confidence.

Stanlib chief economist Kevin Lings previously explained that South Africa’s government has to create an enabling environment to foster confidence in the local economy and encourage businesses to invest in fixed assets.

For Lings, the state has simply run out of options due to its deteriorating financial health and the collapse of public companies. It cannot afford to invest by itself and needs the private sector’s resources.

“I would say that deregulation is your only option now. It is your only choice, and while you may not like it ideologically, it is your only option,” Lings said.