How much it will cost to save South Africa’s economy

South Africa’s economic turnaround will cost at least an estimated R2.3 trillion over the next ten years, as the government needs to fix the country’s deep-rooted structural problems to achieve greater economic growth.

Bureau for Economic Research (BER) senior economist Roy Havemann revealed this, saying the BER’s baseline forecast is for economic growth to average just below 2% from 2026 to 2029. 

“While this would be faster than the decade before the pandemic, this is not enough,” he said.

Havemann’s comments come after South Africa’s GDP figures for the third quarter of 2024 were released.

Surprisingly, GDP contracted in the third quarter by 0.3%, largely due to a volatile agricultural sector. However, even excluding this sector, the third quarter’s growth was a meagre 0.4%. 

“While there are some positive signs in Q4 2024 – particularly business confidence – growth of even 1% remains a challenge,” Havemann said.

He further explained that South Africa must first look at what is holding the country back to break free from being stuck in the 1% to 2% growth range.

Firstly, load-shedding has caused deep damage to South Africa. 

“Without a stable supply of electricity, we have been unable to expand the local mining and manufacturing sectors, with knock-on effects throughout, including construction,” Havemann said.

“While a cheap and secure supply of electricity was previously a comparative advantage for South African production since load-shedding began in 2008, the opposite has been true.”

Therefore, the lifting of load-shedding in 2024 so far has been positive for demand and provided a boost to sentiment. 

However, Havemann warned that businesses need to be sure that there is a stable supply of electricity before committing to long-term investment.

Secondly, South Africa’s ports and rail system have been weak. 

Port cargo has fallen and freight rail capacity has been on a long downward trend since 2018. Port capacity has been stagnant over the past three years.

The impact of Transnet’s port crisis has been mainly focused on miners’ inability to export their commodities to global markets. 

This has cost the South African economy billions in lost economic output and foreign exchange earnings, with mining companies resorting to trucking their products to Maputo for export. 

However, the inefficient operation of South Africa’s ports also affects companies that import goods that are sold to local consumers or need foreign equipment for manufacturing purposes. 

Thirdly, municipal water supply problems have underscored local government weaknesses. 

“Not only is water a critical input for many activities, the lack of stable water supply in major metro areas has been a drag on consumer and business confidence,” he said. 

“Furthermore, it has exposed serious weaknesses in local government capacity.”

Lastly, Havemann identified ongoing service delivery issues and broader governance problems as constraints. 

He explained that inadequate public service delivery hurts the poor the most, as wealthier households can source many of their needs from the private sector.

In addition, governance issues – like South Africa’s greylisting in 2023 – have also harmed the country’s ability to do things, for example, fast and unburdened cross-border transactions.

Luckily, Havemann said the government’s delivery unit, Operation Vulindlela, has identified these and other constraints on economic growth and plans to address a large part of them over the next few years. 

“We have taken these areas as levers in the BER’s macro-econometric model to see what the impact on growth could be,” he said. 

“Ongoing electricity reform, ports and rail reform, water and governance reform, and some other reforms could meaningfully lift economic growth to above 3%.”

The BER’s modelling shows that implementing these reforms could accelerate growth to 3.3% as soon as 2025. This can be seen in the graph below.

However, this growth will not come cheap. South Africa is expected to spend an estimated R2.3 trillion on addressing just these four constraints over the next ten years.

The vast majority of that will come from a 10-year R2 trillion investment in the country’s grid and new power generation.

Havemann said eliminating load-shedding will support growth in several ways. 

The BER’s model uses the energy availability factor (EAF) to reflect better performance at Eskom. 

“However, this is not enough. A durable improvement in electricity performance needs the electricity reforms to continue,” he said. 

“This includes a proper unbundling of Eskom and a viable business model and balance sheet for the National Transmission Company of South Africa to ensure that the new transmission grid is constructed at scale.”

In 2023, Eskom announced its ambitious plan to build 14,000 km of transmission lines over the next decade, an infrastructure project the likes of which South Africa has never done. 

The BER projected that an investment of R200 billion will be needed to address rail constraints, with the aim of increasing capacity, reducing costs, and preserving old jobs while creating new ones.

In FY2024, Transnet carried 151.7 million tonnes of capacity. 

Using data from the South African Association of Freight Forwarders, the BER estimates that an additional 60 million tonnes could be added to capacity within only a few years. 

This will boost both export capacity and investment in the country.

A further R100 billion will need to be invested in water infrastructure to secure water supply to households and businesses in the country.

In addition, he said the South African National Water Resources Infrastructure Agency will be key in creating a bankable entity that can deliver bulk water. 

“But bulk water is not the major constraint over time; rather, the delivery at a municipal level. Strengthening local government capacity and capabilities is vital,” he said.

Along with all of these reforms, Havemann said governance will be key.

“The decision by the Financial Action Task Force to ‘greylist’ South Africa because of weaknesses in our money laundering regime highlighted that the governance concerns from the ‘state capture’ era have real-world consequences,” he said.

Havemann emphasised that all of these reforms and how they may play out are not the BER’s baseline forecast, as a clear programme of action and implementation from Operation Vulindlela still needs to be seen.

However, Operation Vulindlela Phase 1 showed that a dedicated reform programme can deliver results.

“Significant progress was made, particularly in electricity, and limited but still important progress was made in logistics and other areas,” Havemann said.

“To repeat something we have said several times this year, the implementation of existing structural reform plans can lift economic growth beyond 2% – and, in fact, we can get there in a short space of time.” 

“But the crux is in the implementation, and any further delays will mean that 3% becomes more and more difficult to reach.”