The tide is turning for South Africa

The enormous risk premium built into South African assets is beginning to unwind, and with more momentum and structural reform, the country could qualify for a sovereign risk upgrade.

According to Nedbank chief economist Nicky Weimar, South Africa’s economy is starting to tick up after a long sideways drift.

Weimar was speaking at the Nedgroup Investments Cash Solutions Treasurer’s Conference 2024, which took place on 18 September.

Over the past few years, adverse structural and cyclical forces have hurt South Africa’s economy. One particularly prevalent force in 2024 was South Africa’s political risk ahead of the May general elections.

However, this risk was reduced significantly following a peaceful election and transition to a new Government of National Unity – which was largely seen as market and investor-friendly.

This had a marked positive impact on the rand, as reduced political risk firmed the currency and made it more resilient.

As a result, the rand is one of the few emerging market currencies that has managed to hold its own against the US dollar so far this year.

Weimar described the rand as the economy’s “shock absorber”, as any shocks to the country’s economy are immediately felt and seen in the rand’s value.

She added that considering the rand’s status and factoring in the country’s structural challenges, Nedbank sees the currency’s fair value between R17.50/USD and R18.50/USD.

This means the rand is currently trading at a level stronger than its fair value, showing a marked improvement from 2023 and earlier this year.

Another boon for South Africa’s economy was that structural constraints, such as energy and logistics crises, have eased, with energy in particular making a remarkable turnaround.

Weimar said Eskom’s performance has improved significantly over the past few months, which is supported by the return to service of several units at Kusile Power Plant.

The utility was able to achieve an energy availability factor of over 70% and go over 150 days without implementing load-shedding.

Weimar said Eskom’s turnaround has been “nothing short of spectacular”, and many of the improvements it made were not ‘quick fixes’ as has previously been the case.

Aside from an improved operational performance, the significant adoption of rooftop solar over the past year has also contributed to better energy availability in 2024.

South Africa’s logistics crisis has not seen the same turnaround. While Transnet is implementing a turnaround plan, reform is slow.

Weimar said container processing has increased from the lows of mid-2023 but there is no evidence of the ports improving the processing of bulk minerals.

Equally, rail is handling more freight than was the case in mid-2023 but also appears to be losing upward momentum.

She said this sector will need to address its challenges – and fast – to keep South Africa’s growth momentum going.

Another green shoot for South Africa’s economy is the National Treasury’s aim to bring the budget deficit back to around 3% of GDP.

Weimar said a smaller deficit, along with the R150 billion the Treasury is tapping from the Reserve Bank’s gold and foreign exchange reserves, should help turn the public debt burden around.

She said the National Treasury is making considerable progress towards this goal.

Going forward, Weimar said structural constraints are likely to be less damaging to the economy over the next three years.

The boost is expected to come from the following:

• More stable and reliable electricity supply
• Logistics bottlenecks are also expected to improve slightly, albeit still largely inefficient
• The government is expected to press ahead with fiscal consolidation, which should go a long way towards reducing the country’s risk premium and lowering the long-term cost of capital

However, she warned that other challenges will take longer to resolve, including the following:

• Many municipalities are struggling, crippled by poor leadership, stretched finances, corruption, and crumbling infrastructure, which affects the quality of public services 
• Equally, crime and corruption will remain impediments despite efforts to remove South Africa from the grey list

“We still can’t grow by 2%, but for the next three years, it certainly looks better,” she said. 

“We’ve got to press ahead and get a lot more of those issues into the light orange or the light green, and then we would materially be in a better position to sustain higher economic growth.” 

The “light green” and “light orange” refer to the graph below, which tracks South Africa’s progress in addressing certain growth constraints.