The stars are aligning for South Africa

South Africa’s stars began to align in 2025, with external factors in the form of surging commodity prices and relative geopolitical calm combining with local improvements. 

These local elements include cyclical tailwinds from lower inflation and interest rates, as well as fundamental improvement in state finances, reform progress, and stabilisation of key state-owned enterprises. 

However, these local improvements will still take some time before they meaningfully translate into sustainably faster economic growth. 

There are also numerous threats to this positive outlook, including the upcoming local government elections, the ANC’s elective conference in 2027, and external shocks. 

Old Mutual Investment Group portfolio manager Jason Swartz explained that this leads the asset manager to have an approach of “watchful optimism” for 2026 and beyond. 

Swartz said that South Africa’s economy in 2026 is likely to be characterised by a slow transition from a base of being stuck around 1% real GDP growth to a more robust 1.5% to 2% for the foreseeable future. 

This is being driven by the combined impact of structural reforms and current cyclical tailwinds, which are all being boosted by surging commodity prices. 

The major improvement that occurred in 2025 was the sustained improvement in Eskom’s performance, which, alongside private investment, has stabilised the electricity supply. 

“This progress is reflected in a sharp improvement in energy availability and a significant reduction in unplanned outages – an encouraging sign that one of the economy’s most binding constraints is beginning to ease,” Swartz said. 

Eskom’s improvement was coupled with a stabilisation in container volumes at Transnet and concrete progress towards increased private participation in the logistics sector. 

However, the majority of the impetus in 2025 came from cyclical factors, which are not expected to last forever, potentially resulting in South Africa growing in a stop-start fashion

In particular, South Africa’s terms of trade were boosted by surging precious metals prices, which, in turn, provided significant benefits for government finances and the rand.

This was coupled with sustained low inflation, with the National Treasury formally adopting a lower inflation target. Swartz said this paves the way for lower interest rates in the long run and a host of benefits from lower debt-servicing costs to improved competitiveness. 

Underpinning all of this was the Government of National Unity (GNU) remaining intact despite several disagreements around key issues. 

South Africa’s sovereign credit rating was upgraded by S&P to ‘BB’, the first such upgrade in 20 years, and successfully removed from the Financial Action Task Force grey list.

“Certainly, these drivers firing together suggests that South Africa is better positioned to weather global crosscurrents than we have been in the recent past,” Swartz said. 

Slow and steady

While these factors point to a much better performance from South Africa’s economy in 2026, there will not be a growth miracle for the country. 

South Africa’s transition to a sustained level of faster economic growth is still some time away, as it has to continue on the right path for years to come before the benefits are fully reaped. 

“It appears odd that, given the broad range of positive economic drivers we experienced in 2025, the real GDP growth outlook for 2026 and beyond is not higher. Perhaps closer to the 2% or even 2.5%,” Swartz said. 

“The sobering reality is that structural challenges persist in South Africa, largely in the form of supply-side bottlenecks.”

Swartz explained that these constraints have kept a lid on our potential growth for years, and in so doing, cripple essential infrastructure for years to come, effectively immobilising South Africa’s growth engine. 

While energy bottlenecks are clearing, improvements in the logistics sector are happening, albeit slowly. However, rail and port volumes remain significantly below levels seen five years ago, and therefore, constrain economic growth. 

Feform in the logistics sector focuses on restructuring Transnet, establishing an independent Transport Economic Regulator, and increasing private sector participation in rail and port networks. 

These interventions are expected to meaningfully lift the “speed limit” previously imposed on the economy by infrastructure bottlenecks. 

“Natural spillover effects include improved business sentiment and subsequently higher capex and investment, which in turn further solidifies growth momentum,” Swartz explained. 

The outlook for South Africa, however, is not all good, with there being significant risks to faster economic growth in the country. 

“While we believe the risk skew for South Africa’s growth trajectory is firmly to the upside, there are a few downside risks we are watching carefully,” Swartz said. 

The 2026 local government elections certainly present a source of political noise. Contestation between key GNU partners, particularly the ANC and DA in metro battlegrounds, could test the stability of the national coalition. 

Furthermore, long-term investors are already considering the 2027 ANC elective conference, which introduces succession uncertainty that could impact policy continuity and the future of the reform agenda. 

Another risk in our view is renewed geopolitical risk and trade tensions. South Africa remains a soft target for the US administration’s trade policies. 

While the direct growth impact of 2025’s tariff hikes was modest, omnipresent US policy uncertainty contributes to currency volatility and impaired global sentiment. 

The potential loss of African Growth Opportunity Act benefits or additional sanctions related to South Africa’s geopolitical stances remains a tail risk. 

Lastly, a downside commodity price shock would be another key risk to growth. South Africa’s economic prospects have always been strongly linked to a potential windfall from higher commodity prices, creating a virtuous positive revenue shock. 

While not our base case view, this scenario, particularly if severe, would jeopardise the economic buffers created in 2025. 

Beneficiaries of the higher commodity prices, such as bond yields, the rand and fiscal performance, will likely be challenged.