South Africa lost R4.1 trillion

South Africa’s per capita GDP would need to grow at between 8% and 8.5% over the next ten years to reach the global average. 

Depending on the prevailing inflation level, this would require between 3% and 5% GDP growth, at stable population levels. 

South Africa was not always in this situation, with its per capita GDP closely tracking the global average until 2010, when the economy was experiencing strong growth. 

However, since then, the country has been hindered by lacklustre economic growth, primarily due to the collapse of state-owned enterprises (SOEs), widespread corruption, and policy uncertainty, which has left it lagging behind its peers. 

This is feedback from investment strategist at Investec Wealth & Investment, Osagyego Mazwai, who outlined the significant impact of declining business confidence on South Africa’s economy. 

Mazwai stated that the South African economy would look significantly different if the country’s economic growth had been in line with that of its emerging market peers since 2010. 

Up until then, the country was one of the best-performing emerging markets, with growth averaging over 4% during President Mbeki’s second term in office. 

Had it maintained the emerging market average of 4.5% since 2010, the country’s economy would be R4.1 trillion larger than it is now. 

In this case, the government’s finances would be much healthier, with around R5 trillion more in cumulative taxes collected. This would effectively erase much of the state’s current debt load. 

Furthermore, South Africans themselves would be far richer, with the country’s GDP per capita being above $20,000 on a purchasing power parity basis, rather than the current level of just over $10,000. 

Instead, South Africa’s economic growth has averaged less than 1% for the past decade, which is lower than the population growth rate of 1.6%. 

This means that, on average, South Africans have been getting poorer over the past decade, significantly impacting their quality of life. 

For South Africa to return to the global average GDP per capita, its economic performance would have to drastically improve. 

Mazwai estimated that to reach the global GDP per capita average, the country’s economy would have to grow between 3% and 5% in real terms for the next ten years. 

In nominal terms, the economy would have to grow at 8% to 8.5%. This is above the global average growth rate of 4.4% and the average growth rate for middle-income countries of 5.9% since 1991. 

Mazwai warned that should South Africa continue on this average growth trajectory, the dislocation between South Africa and the rest of the world will likely worsen. 

What South Africa needs to return to its average can be seen in the graph below. 

What is holding South Africa back

Mazwai explained that one of the biggest drivers of South Africa’s poor economic performance has been its stagnant and declining business confidence. 

Investec’s analysis shows a close correlation between business confidence and economic outcomes, particularly GDP growth.

For instance, President Thabo Mbeki’s second term saw average GDP growth above 4%, which coincided with record levels of business confidence. 

This also translated into improved employment outcomes, with the unemployment rate falling from 28% in 2004 to 21% in 2008. 

This is not a one-way street, as Mazwai explained that business confidence is both a driver and a result of GDP growth. Improved confidence can create a powerful feedback loop.  

“The key is that business confidence should be the main focus of the current government when solving for economic and employment growth, in turn solving for the poverty, unemployment and inequality problem in South Africa,” Mazwai said.

“Our fundamental proposition is that South Africa needs to get back to business, and by that, we mean get back to the basics of business confidence,” Mazwai said.

Much of this hinges on government policy, with certainty regarding the future being crucial for investment and economic growth. 

Furthermore, these policies have to encourage investment in the economy and, crucially for South Africa, be implemented more effectively. 

“There are internal factors that drive business confidence that are within the control of the state. This includes economic policy that supports business optimism. Policy formation processes must have business confidence at the centre,” he said. 

This includes focusing on basic government functions, such as delivering services ranging from electricity and water to road infrastructure and logistics. 

Some areas, while still fundamental, are much more complex for the government, such as the structural reform of key industries, particularly electricity and logistics. 

These reforms have been in the works for years and are still far from completion, hindering private investment in these sectors. 

More crucially, there also needs to be a significant reduction in red tape. In effect, it needs to be much easier for businesses to be created and operate in South Africa. 

Another major area that the government needs to prioritise is investment in higher education to broaden the pool of skills in South Africa. 

There is a significant mismatch between the number and kind of graduates South African universities produce and what the private sector demands, leaving many unemployable. 

Currently, the government is making some progress in these areas, but not quickly enough to boost business confidence and kickstart the positive flywheel. 

“Economic policy that negatively influences and impedes the ability of businesses to make optimal capital allocation decisions hurts business confidence and the relative ability to invest,” Mazwai said.