South Africa’s hidden crisis costing it billions

South Africa is suffering from an ongoing confidence crisis, with local and global investors losing trust in local political institutions and the country’s policies. 

However, the Government of National Unity (GNU) provides an opportunity for this picture to flip and for confidence in South Africa to be restored, leading to much better economic outcomes for the country. 

This is feedback from Old Mutual chief economist Johann Els, who outlined his expectations for the South African economy in 2025 in his annual economic outlook. 

Broadly speaking, Els expects the future to be much better than the past for South Africa, with several headwinds turning into tailwinds. 

Chief among these is the sharp reduction in load-shedding, which has historically been a handbrake on the South African economy. 

Coupled with this are improvements in the country’s logistics sector and cyclical growth drivers, such as lower inflation and interest rates. 

However, Els explained that one of the most overlooked issues in South Africa is a lack of confidence in the country due to its deteriorating political climate. 

The main driver of this deterioration is policy uncertainty and question marks around the country’s future, given some of the legislation enacted in the past decade. 

There was not always a lack of confidence in South Africa, with the country experiencing strong economic growth in the early 2000s on the back of sound policy and good governance. 

Under President Mbeki, the South African economy grew by an average annual rate of 4.1% as foreign investment flooded into the country. 

This was on the back of the government running consistent budget surpluses and state spending driving positive economic outcomes. 

Mbeki was also surrounded by trusted individuals, with Trevor Manuel leading the National Treasury and Tito Mboweni being the Reserve Bank Governor. 

Els explained that this trust is vital for economic growth as it enables businesses and households to plan for the future and commit capital to fixed investments. 

Thus, as a result, investment flooded the country, and it enjoyed strong economic growth for close to a decade. This can be seen in the green-shaded area in the graph below. 

Things changed dramatically when Jacob Zuma became president of South Africa and began making appointments based on personal preference rather than merit. 

During this period, Els said that concerns began to grow about South Africa’s policy direction and trust in the individuals running the country began to decline. 

As concerns grew, economic growth collapsed. Coupled with rising government spending, the state’s debt load ballooned, further eroding confidence. 

South Africa’s strong GDP growth during the Mbeki era stopped almost instantly, and the country’s debt rapidly increased.

Els said studies from economic institutions indicate that the declining confidence in South Africa has cost it one percentage point of economic growth per annum over the past decade. 

This means that if confidence remained at the levels seen under Mbeki, the local economy would have grown by over 2% per annum over the past decade instead of 1%. 

On a more positive note, Els said that the formation of the GNU has seen a substantial improvement in the political climate in South Africa and an uptick in confidence. 

As concerns ease, investment in the local economy should pick up, and economic activity should steadily rise towards 2.5%. 

Much of this is due to pre-GNU reforms currently underway in the electricity and logistics sector. 

However, Els was clear that the GNU’s formation remains significant if only to ensure these reforms are completed without delay. 

If the reforms are enhanced or accelerated, then growth can pick up to above 3% in the medium term. This could create a positive feedback loop, which in turn drives up confidence in the economy. 

However, even growth at this rate would not be enough for South Africa’s huge unemployed population to shrink. 

Economic growth of 3% per annum would merely be enough to stop the unemployment rate from rising by providing enough jobs to cover new entrants into the labour market. 

The rapid improvement in the political environment under the GNU can be seen in the green-shaded area in the graph below.