Things are looking up for South Africa

South Africa’s economy is set to perform much better in the coming years than it has over the past decade as reforms gain traction and the private sector begins to take money off the sidelines and invest it locally. 

The local economy has been under immense pressure over the past decade, with load-shedding and State Capture limiting its average annual growth to below 1%. 

However, Old Mutual Wealth investment strategist Izak Odendaal said this is all set to change following the formation of the Government of National Unity (GNU), which has pledged to accelerate reforms already underway. 

Though the May election result was unexpected, with the ruling ANC doing worse than expected, the formation of a centrist coalition, styled as the GNU, was also a positive surprise from the market’s point of view. 

It is also worth noting how important it was for the long-term credibility of South African democracy that the ANC immediately accepted the loss of its majority after 30 years in power. 

The GNU was founded on a set of agreed-upon core principles, including fiscal discipline, growth-enhancing economic reforms, and adherence to the rule of law. 

There are obvious areas of disagreement between the ANC and DA, the largest coalition partners, including contentious health and education acts (NHI and BELA). 

But Odendaal explained that there is also a strong incentive for all parties to make it work. Whether it lasts the full five years remains to be seen. 

The two major threats to the GNU are the local government elections in 2026 could alter the political landscape, followed by internal ANC elections in 2027. However, a lot can be done in two years to cement crucial and long-lasting economic reforms. 

The progress in stabilising Eskom’s operational performance and restructuring the electricity market has already had a major impact. There has not been nationwide load-shedding since March.  

The next key area of reform should be logistics, and 2025 must be the year when Transnet sees not only ongoing operational improvements but tangible evidence of private sector participation in rail and ports. 

Deals must be signed, concessions issued, and wheels must hit the steel. This will be crucial for the economy’s performance and for investor confidence.

Apart from electricity and logistics, water has emerged as the next frontier of economic crisis. This is largely a localised problem centred on weak municipal performance. But if water runs out in the largest city, Johannesburg, it is a headwind for the whole economy. 

The private sector can also get involved in running bulk water systems. So, much precious water is lost through theft and leaks that private investment in infrastructure can pay for itself.

South Africa needs to spend more on infrastructure, but the bulk of this spending needs to come from the private sector as the government’s finances are constrained. 

This means creating a regulatory, financial and operational environment that attracts private capital from home and abroad. Odendaal said more progress must be made on this front in 2025.

However, progress has been noticed, with rating agency S&P Global raising the outlook on the rating of South African government debt from ‘stable’ to ‘positive’, in November.  

The country’s rating is still three notches deep into ‘junk status’ at BB- on foreign currency debt, so there is a long way to go to retain an investment grade rating (BBB or above), but this is the first step. 

S&P recognised ongoing efforts to reduce government borrowing and the improved economic outlook, expecting GDP growth to average 1.4% over the medium term. 

This is still lower than many other forecasters, including the Reserve Bank, but points in the right direction. It noted that the GNU has improved political stability and that the increased “impetus for reform” should boost private investment and economic growth.

Their competitor, Moody’s, has not been so generous, and last week maintained the outlook on its rating of South African government bonds at ‘stable’. 

However, Moody’s expects a gradual increase in real economic growth to 1.7% by 2026 and a stable government debt burden at around 80% of GDP. 

It also expects the GNU to continue implementing structural reforms to ease growth bottlenecks. Moody’s also praised South Africa’s strong institutions, such as the judiciary and the central bank, its deep financial sector and its lack of foreign debt. 

However, it also acknowledges challenges posed by the country’s “extensive inequalities”, which make reforms difficult and increase social risk.

While progress has been made, it is too soon after the formation of the GNU to expect companies to commit to big spending plans and start implementing them. 

As Moody’s noted, the “under-investment over the last 15 years, especially in electricity and logistics, will require time to rectify.”

Fixed investment should pick up with higher business confidence, particularly as infrastructure investment opportunities open up. 

The positive news relates to the green shoots in consumer spending. Again, the third quarter is too soon to see the impact of lower interest rates, but real household spending was positive, buoyed by falling inflation. 

More recent data, such as vehicle sales numbers for October and November and initial reports on Black Friday sales, certainly point to consumers loosening the purse strings. 

Pension fund withdrawals under the new two-pot system are also more likely to reflect in fourth-quarter data than in the third quarter.

Despite the disappointing headline number for third quarter GDP, which will drag down 2024 calendar year returns, the outlook for better growth in 2025 remains unchanged. 

The consensus forecast is 1.7% for 2025 and 1.9% for 2026, according to a Reuters poll.

This is still low by emerging market standards but would represent a major improvement from the sub-1% growth trend of the past decade, Odendaal said.