Eskom miracle not enough for South Africa

The dramatic turnaround of Eskom is not strong enough to boost the South African economy alone, as logistics bottlenecks, an elevated debt-to-GDP ratio, and unemployment continue to limit growth. 

This is feedback from rating agency S&P Ratings in its latest report on emerging markets for the fourth quarter of 2024, where it said risks remain during this period of fragile stability. 

S&P did not change its growth outlook for South Africa despite a significant turnaround at Eskom and no load-shedding for over six months. 

The rating agency left its forecast for economic growth in 2024 at 0.9% and 1.5% in 2025, up from 0.6% in 2023. 

It said that despite electricity shortages dissipating, logistics bottlenecks remain a serious constraint to economic growth, as do several underlying issues. 

“South Africa’s structural economic issues and infrastructure gaps are undermining the country’s growth prospects, but business sentiment is improving following the formation of the Government of National Unity,” it said. 

Stronger second-quarter GDP data and the improvement in South Africa’s current account narrowing are helping to stabilize the country’s near-term outlook. 

S&P said the election outcome was broadly seen as positive, with South Africa now being under the first coalition government since the end of apartheid. 

“But while we are relatively optimistic on headline GDP growth compared with the recent past, our forecast still implies per capita GDP growth of just 0.3%.”

“For the new government to put debt to GDP (currently set to end 2024 at 78%) on a permanent downward path, we think GDP growth of closer to 3% would be required.” 

This would require the country to not just fix Eskom and Transnet but also solve all of its underlying issues, such as high unemployment and extremely elevated inequality.

“In our view, that work would take many years,” the agency said. 

Transnet the major hurdle 

S&P highlighted Transnet as the major obstacle to sustained economic growth in South Africa as the poor performance of the state-owned company handicaps exports and increases the cost of imports. 

South African corporates’ operating conditions have remained largely stable in recent months, supported by a smooth political transition post-elections and relief from Eskom power outages.

These factors are counterbalanced by below-trend economic growth, elevated interest rates, muted consumer demand, and persistent local and global supply-chain challenges, which reduce efficiency and increase costs. 

The agency said that in terms of corporate ratings, stability mainly reflects companies’ managing existing challenges, not an improvement of operating conditions. 

According to S&P’s research, logistics inefficiencies and cost pressures are the number one issues for most companies in South Africa. 

“While local transportation infrastructure provider Transnet seems to have halted the deterioration in its operations, port and rail services are far from delivering an adequate and efficient service.” 

Notably, some local and regional trade has shifted to neighbouring countries due to poor port performance in South Africa, resulting in the company and economy losing out on billions in potential earnings. 

Furthermore, Transnet’s 2025 recovery plan targets seem rather optimistic, S&P said. 

The plan targets rail volumes of 170 million tons (mt) in Transnet’s fiscal 2025 versus an outcome of 151.7 mt in fiscal 2024. 

This is despite its railway network being plagued by high levels of cable theft and vandalism, with community unrest also increasing, disrupting operations. 

Chairman Andile Sangqu said the company also struggled with strained relations with some of its most important customers, following years of inefficient operations, which the company was working hard to reset.

Transnet’s collapse since 2019 has severely impacted South Africa’s economy, with some estimating it cost the country R353 billion in lost economic activity in 2023. 

Between 2009 and 2016, rail accounted for approximately 26% to 27% of total road and rail payload. This percentage has been in steady decline, reaching a low of 15% in 2022 and 16% last year.