Rise and fall of South Africa’s economy 

South Africa’s economy has performed poorly over the last decade, with economic growth hovering around 1% despite significant increases in government spending. 

The combination of poor growth and elevated state spending has caused South Africa’s credit rating to deteriorate to two notches below investment grade. 

Credit ratings are a third-party assessment of an entity’s creditworthiness. They give investors a sense of the entity’s willingness and ability to repay debt in a timely manner.

Credit ratings for a country are an important consideration as they affect foreign investment and interest on capital invested.

South Africa’s credit rating decline occurred in a relatively short period, with the country slipping from a BBB+ rating from S&P Global in 2012 to BB- in 2022. 

However, the South African economy did not always perform this poorly and, at times, has even outpaced its more developed peers. 

A recent research note from the Bureau of Economic Research (BER) outlined South Africa’s rise to 6% annual GDP growth after 1994 and subsequent fall to less than 1%. 

The initial policy framework of the Government of National Unity (GNU), led by the ANC, was set out in the Reconstruction and Development Programme (RDP). 

Two years later, a macroeconomic strategy titled Growth, Employment and Redistribution (GEAR) was tabled by the minister of finance. 

The GEAR strategy aimed to achieve an economic growth rate of 6% per year by the year 2000 while substantially raising investment, employment growth and exports. 

In 2006, the Accelerated and Shared Growth Initiative of South Africa (AsgiSA) was adopted, which aimed for 4.5% annual growth until 2010, accelerating to 6% thereafter. 

The government adopted South Africa’s first comprehensive National Development Plan (NDP) in 2012, which aimed to achieve annual economic growth averaging 5.4% until 2030. 

While these growth targets are ambitious, the Mandela and Mbeki administrations achieved these lofty goals while reducing the government’s deficit and slashing debt. 

In 1994, South Africa had a GDP of R3.6 trillion (in constant 2023 prices). In the first five years of democracy, when Nelson Mandela was president, economic growth rose by an annual average of 2.7%. 

In the following period from 2000 to 2008, when Thabo Mbeki was president, economic growth accelerated significantly at a 4.2% annual average, which was substantially higher than population growth. 

By 2008, domestic output was recorded at R5.9 trillion in 2023 prices, up 44% from 1999. The population increased by only 12%, implying that GDP per capita increased by about 29% over the same period. 

This was South Africa’s economic heyday. The economy was booming, and the government was running consistent budget surpluses. 

Foreign investors were attracted to this positive growth story and pumped billions into the local economy, creating a virtuous cycle. However, it would not last. 

This period of strong growth ended abruptly in 2009 when the Global Financial Crisis (GFC) caused GDP to contract by 1.5%. It was also the year Jacob Zuma became president.

The graphs below show South Africa’s economic growth under the five administrations since 1994, followed by an indication of how the economy could have grown if their policies met their ambitious goals.

Growth resumed in 2010 but gradually lost momentum in the following years as the impact of State Capture on key institutions became clear. 

By 2018, real output reached R6.9 trillion, 19% higher than in 2009 – equal to 1.9% average annual growth. 

BER data shows the population was 14% up over the same period, implying that GDP per capita increased by just 4% in nearly a decade. 

South Africa’s economy continued to lose momentum after 2018, despite hope for improvement after Cyril Ramaphosa became President and a period of euphoria in financial markets. 

In 2020, the economy contracted by a substantial 6% as the Covid-19 pandemic caused global panic, followed by an artificially induced economic shutdown.

The economy took two years to recover from the malaise, and hope, once again, surged to new highs as the government pledged reform and stimulus to boost economic activity.  

However, growth remained lacklustre, with the country’s GDP in 2023 reaching R7 trillion, not much higher (1%) than in 2019. Over the same period, the population expanded by 6% to reach 61.3 million people, implying that GDP per capita fell by 4%.

Declining economic growth was coupled with a period of significant increases in government spending, weakening the country’s fiscal standing. 

This combination has resulted in government debt as a share of GDP skyrocketing to above 75% in the current financial year. 

As a result, debt-servicing costs have grown immensely – eating up 22 cents of every rand the government collects in tax, equivalent to over R1 billion a day. 

Rating agencies do not look kindly upon this kind of financial deterioration. All three have downgraded South Africa to below investment grade, also known as ‘junk’ status. 

This means that many pension funds and investors will not invest in South African assets, as their mandates limit them to investment-grade stocks and bonds.

The graph below shows South Africa’s deteriorating financial health and subsequent rating downgrades by S&P Global. The debt-to-GDP ratio is inverse.