South Africa’s forgotten crisis costing it billions

South Africa’s economic growth has been consistently hobbled by a lack of confidence in the country’s economy, policy direction, and overall climate. 

Increased policy uncertainty and an unstable political environment have continued to knock business and investor confidence, limiting investment in the economy. 

As a result, South Africa’s economy has grown at an average annual rate of 1.1% per annum from 2009 to 2024.

While confidence has improved since the formation of the Government of National Unity (GNU), it recently took a hit from tension within the coalition government. 

This is feedback from Old Mutual chief economist Johann Els, who recently presented the insurer’s mid-year macroeconomic outlook. 

Els outlined some of the major trends impacting global growth and South Africa’s economy, focusing on structural forces that have prevented the country’s GDP from growing over the past 15 years. 

Of particular focus was South Africa’s ongoing confidence crisis, which raised concerns about government policy limiting investment and growth. 

This concern is primarily caused by policy uncertainty, a lack of implementation, and the doubling down on policies that have not improved economic outcomes. 

When concern about politics and policy was at its lowest level in the 2000s, South Africa experienced a relative economic boom. 

The country’s economy grew by over 3% per annum throughout this period, peaking at over 5% just before the Great Financial Crisis and Jacob Zuma’s ascension to the presidency. 

Since then, concern in the country’s political environment has steadily risen, resulting in declining investment and economic growth. 

Els explained that South Africa’s economy could have grown at well above 2% per annum over the past decade if confidence levels had matched those in the 2000s. 

Instead, the country’s economy has averaged an annual growth rate of less than 1% for the past decade and only 1.1% for the past 15 years. 

Despite this, Els was clear that South Africa is not a failed state, ranking better than most emerging market countries on the Fragile States Index. 

The graph below shows the unfolding confidence crisis in South Africa over the past decade and its impact on economic growth. 

GNU hope

Concern about South Africa’s political environment most noticeably fell following the formation of the Government of National Unity (GNU) in June 2024. 

The country was filled with hope, and investment in local financial assets followed. There was widespread belief that the coalition government would drive better economic outcomes. 

For the first time in its democratic history, South Africa’s political direction is not determined by a single political party, and the coalition includes business-friendly parties. 

However, this optimism is yet to result in improved economic outcomes for South Africans, with much investment confined to financial assets. 

This is ‘hot money’ that can leave South Africa just as quickly as it flowed in, making it unlikely to result in substantially faster growth. 

Els explained that the country needs fixed capital formation in productive projects. This type of investment is highly sensitive to the political environment. 

When committing capital to a country for a significant period of time, investors want certainty regarding the country’s future. South Africa has lacked this for the past 15 years. 

Els said that it is not clear that the GNU can deliver more certainty for investors and businesses, at least in the short term. 

Continued tension between coalition partners, the Budget debacle, and the recent firing of a DA deputy minister have put the GNU’s future on the line. 

While this type of coalition politics is the norm for some countries around the world, it is South Africa’s first such experience with an elected multi-party government. 

Furthermore, most countries with coalition governments have some credibility to lose, whereas South Africa has very little it can afford to lose after the past decade. 

However, Els is optimistic that concerns about South Africa’s political environment will continue to ease as the GNU implements its agenda. 

Investors will gradually grow accustomed to coalition politics in South Africa, and it appears that the GNU will hold despite the public brinkmanship between the ANC and partners.