Things looking up for South Africa 

South Africa could have a far stronger economic outlook following positive developments over recent months, including prolonged load-shedding relief and the election of a new government.

According to Investec chief economist Annabel Bishop, South Africa continues to work towards removing the impediments to a stronger economic growth environment.

“Most tangibly so far is the halt in load-shedding, but the key is that the change in government has lifted the potential for a stronger outlook,” she said.

In addition, Bishop said the downside risk has been meaningfully reduced, as fiscal consolidation is a fundamental tenet of the newly established Government of National Unity (GNU) in South Africa. The formation of a GNU meant the country avoided a shift to the left and fiscal deterioration.

Before the general election in May, Bishop warned that a far left-leaning coalition could be severely harmful to the economy and markets.

The formation of a GNU was, therefore, seen as a far more positive outcome for South Africa.

Earlier this month, Finance Minister Godongwana highlighted a very firm stance on fiscal restraint and consolidation. 

The bond market saw substantial gains on the political developments, along with lower Reserve Bank inflation projections.

Bishop said the Monetary Policy Committee’s (MPC) recent lowering of its inflation forecast substantially towards Investec’s much lower view has come as the formation of the GNU has avoided the feared inflationary effects of a leftist government.

“The risk of an ANC/EFF coalition to govern the country worried markets ahead of the election, creating a marked political risk premium which was suppressing the rand, the bond markets and the JSE, with business confidence in depressed territory too,” she said.

“The likelihood has now fallen for the downside: of weakening economic activity, fiscal deterioration, rising bond yields and inflation, substantial rand weakness, weakening investment growth, persistent load-shedding and other structural constraints.”

In the economic scenarios, Bishop explained that the down case has reduced in probability to 36%, from 51% before the election, as South Africa has seen the likelihood of centrist economic policy outcomes substantially strengthened.

“That is, the ANC has joined with centrist political parties in the main in the GNU, and as such, in itself has seen the potential for centrist policy making and implementation increased, lifting the expected case probability to 50% from 45%,” she said.

“Consequently, the upside now has the potential of a 14% outcome, up from a 3% likelihood, as the possibility of stronger economic growth outcomes has increased substantially.”

She added that strengthening infrastructure investment underpins a marked improvement on the economic outlook. As electricity and logistic capacity rise, so will business sentiment and economic growth.

In the 2000s, which the up and extreme up cases are benchmarked against, good governance saw the highest consistent growth rate for South Africa in 35 years and substantial fiscal consolidation yielded credit rating upgrades. 

The business confidence and the investor climate were boosted to the extent where the later years of the period of 2004 to 2008 saw an extreme upcase with an average growth rate of 5.2% year on year. The ease of doing business in the country also improved.

Godongwana also recently noted its key to “unencumber infrastructure financing from the traditional mechanisms used to fund the budget” with a process similar to the Independent Power Producers (IPP) Office’s renewable energy procurement. 

Bishop said this would make a marked improvement in economic growth.

In addition, Ramaphosa and Godongwana are key proponents of Operation Vulindlela (OV), which has seen substantial work in the energy sector, freight logistics and water infrastructure.

Operation Vulindlela also focuses on planned reforms for local government, “ensuring that the institutional structure and funding model for local government is fit-for-purpose and that municipalities are financially and operationally sustainable”.

“The free and fair elections, establishment of the GNU, and successful working partnership have allowed a stronger economic growth outlook, around 3.0% y/y by the end of the medium term, and have improved investor sentiment substantially,” Bishop said.