The drag on South Africa’s economy which is worse than Eskom and Transnet

South Africa’s political climate is the biggest handbrake on the local economy. It prevents businesses from investing to grow and increases the country’s risk premium, making capital more expensive. 

This is feedback from Standard Bank chief economist Goolam Ballim, who explained during the annual Economy 2025 presentation that the political climate has been persistently bedevilling. 

Many analysts point to Eskom’s troubles over the past decade, Transnet’s inefficiencies, and elevated interest rates as the reason for South Africa’s poor economic performance since the late 2000s. 

However, Ballim said these issues are primarily symptoms of a political climate constraining the local economy and preventing solutions to these problems from being implemented. 

Standard Bank’s research indicates that the political climate is the number one reason businesses hesitate to invest in the local economy. 

Ballim explained that over the past decade, company investments have largely been ‘subsistence investing’—capital allocated to keep the business running. 

This is far from capital that is being invested to grow operations, employ more people, and generate more revenue. 

It is characterised by large sums invested in alternative energy sources, backup water systems, and increased security to keep the business open. 

South Africa’s political climate is dominated by policy uncertainty, which has consistently been rated as the top constraint facing new investment by manufacturers in a quarterly survey conducted by the Bureau for Economic Research.

This uncertainty results in businesses being hesitant to invest in South Africa and contributes to the country’s elevated risk premium. 

In turn, a higher risk premium makes it harder for South African companies and the government to raise capital to fund investment as it pushes interest rates higher. 

South Africa’s political climate has steadily deteriorated since 2008, when an environment conducive to private sector investment translated into strong economic growth and the government running consistent budget surpluses. 

The graph below, courtesy of Ballim, shows the improvement in the political environment in the first decade of democracy and its decline since then. 

As the graph shows, South Africa’s political climate has significantly improved since the formation of the Government of National Unity (GNU) in June last year. 

Ballim explained that the GNU gave investors and businesses certainty that the reforms underway would be complete and possibly expanded or accelerated. 

This is crucial in enabling companies to invest in the country, as there is some certainty regarding the government’s policy direction. 

Furthermore, the GNU gives President Ramaphosa some level of freedom from the ANC’s rigid policy and patronage network. 

It also gives other parties, such as the Democratic Alliance, access to power at a national level, which means that for the first time since 1994, South Africa’s future is not wholly dependent on the decisions of one party. 

With other political parties having ministerial positions, the Cabinet is also far more capable than previous governments. 

Ballim said this goes beyond DA or Inkatha ministers at Home Affairs, Public Works, and other key areas. 

He singled out Police Minister Senzo Mchunu for taking a more scientific approach to fighting crime and Transport Minister Barbara Creecy for accelerating logistics reform. 

However, while confidence can be lost quickly, it is much harder to rebuild, and it will take time before companies and investors commit significant amounts of capital to South Africa. 

Old Mutual chief economist Johann Els explained that one of the effects of a deteriorating political environment is the resulting confidence crisis. 

Local and global investors have lost trust in local political institutions and the country’s policies, which will take years to repair. 

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.

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%.