Is South Africa's economy on the brink of a breakthrough? Early signs suggest the GNU's efforts might just fuel an unexpected lift-off. Claire Bisseker from FinancialMail explores whether South Africa's economy could break free from its long-standing stagnation, with Sanlam Investments Chief Economist Arthur Kamp pointing to the GNU's potential to drive growth towards 2%-3% over the medium term.
It’s been only six weeks since the formation of the GNU, but some brave economists are already predicting economic lift-off.
South Africans are used to hearing that the economy is stuck in a 1% growth trap and will remain there until major structural investments transform our dysfunctional energy and national logistics systems. But are we being too pessimistic about the country’s prospects?
As recently as June, some economists were trimming their 2024 forecasts after bleak GDP data showed that economic growth had contracted in the first quarter and might not even meet the low Reuters consensus expectation of 1% for the year as a whole.
But since then, several key developments have brightened the national mood.
The most important has been the peaceful transition to a government of national unity (GNU), many ministers of which have hit the ground running. The resultant bond market rally has shaved about 100 basis points off the government’s borrowing costs, improving South Africa’s fiscal outlook and reducing the country’s risk profile.
There has also been no load-shedding for about 130 days. The stabilising electricity supply and improved confidence after the formation of the GNU are reflected in the marked rise of the purchasing managers index (PMI) — a measure of the health of the manufacturing sector — into expansionary territory in July. Firms’ expectations of business conditions in six months’ time are now the most favourable they have been since February 2022.
Also crucial is the fact that the rand has recovered all its losses to trade back roughly where it was at the start of the year. This means it should be smooth sailing to get headline inflation down to the middle of the target band in the fourth quarter, precipitating the start of the interest rate-cutting cycle, most likely in September. This should result in the tentative improvement in consumer and business confidence really taking off.
In sum, it’s not difficult to sketch a much more positive outlook for the economy over the rest of the year and in 2025 on the back of greater political certainty and accelerated structural reforms, courtesy of an energised GNU, as well as the expected deceleration in inflation and projected interest rate cuts.
These developments have allowed the Bureau for Economic Research (BER) to revise up its 2025 real GDP forecast of 1.6%, to 2.2%.
“What helps confirm our optimism is the July PMI,” says BER senior economist Shannon Bold. “For me everything is moving in the right direction; the early signs are positive.”
But she concedes that the BER is ahead of the economic consensus for now, with the Reserve Bank forecasting GDP growth of only 1.5% in 2025 and the International Monetary Fund still expecting a dismal 1.2%.
“Everyone is just waiting for something to happen,” says Bold. “South Africans, once burnt, are cautious. But I’m quite optimistic.”
Citibank economist Gina Schoeman, who is expecting growth of about 1.7% next year — though with upside risk — says the reason for caution in the consensus is because of the South African government’s track record of being “all talk and no action”.
“Of course, we’ve had more action [recently] than before,” she concedes, “but I do think we need to see a series of data points, and structural reforms being put in place, to confirm the upside.”
Krutham MD Peter Attard Montalto’s 2025 growth forecast has long been an above-consensus 2.1%, based almost entirely on the lifting of South Africa’s energy constraint.
“We are above consensus because we take a firm view on the impact of a substantive end to load-shedding, and also see the logistics crisis starting to turn slowly,” he says.
“The upside could result if we get capital inflows and an opening of the credit taps, which we assume does happen though only slowly. To get faster capital inflows people will need to see progress in structural reforms and stability in the GNU coalition.”
What it means:
It’s not difficult to sketch a 2%-plus outlook for the economy based on greater political certainty, accelerated structural reforms and interest rate cuts
Interestingly, the BER has modelled what could happen if South Africa achieves a “sudden start” — a significant, abrupt increase in capital inflows due to a positive shift in market sentiment leading to investors rerating domestic debt.
The BER unveiled its new Sudden Start scenario at its 80th anniversary conference in Sandton last week. The picture is eye-watering: the rand rallies to average R12.76 next year, inflation falls to 2.5% and growth rises to within a whisker of 2.5% in 2025 before approaching 3% by 2029.
The term “sudden start” is not made up. Other countries have experienced a sudden start in capital inflows. In Brazil and China, for instance, capital inflows have on occasion been as high as 5%-30% of nominal GDP, though in South Africa they have seldom exceeded 2.5%.
In the Sudden Start scenario, net capital inflows rise to 1%-2.5% of nominal GDP, compared with 0.5% in the BER’s base case. The BER typically attaches a 50%-60% probability to its base case. The Sudden Start scenario carries a low probability, says Bold, but is not improbable.
First off, a sudden large influx of foreign capital would lead to a further appreciation of the rand. The BER estimates it could strengthen to average R12.76/$ in 2025 and R12.52/$ in 2026, and could still be about R13/$ by 2029.
The surge in positive investor sentiment would cause the country’s risk premium and the 10-year government bond yield to fall further, reducing the government’s borrowing costs and improving the fiscal position.
Some of the capital would also flow to the JSE, improving households’ net wealth, which would boost demand for consumer goods.
The strong rand would have the knock-on effect of reducing inflation, pushing it down to 2.5% in 2025, helped by a reduction in energy inflation on the assumption that Eskom continues to get its house in order.
This would allow the Reserve Bank to cut the repo rate to 6.5% by 2026, vs 7% in the BER’s baseline forecast.
In a nutshell: surging capital inflows, supported by favourable external conditions and a general reduction in uncertainty, would help lower inflation and, with the aid of effective domestic policy responses, lead to “a virtuous cycle” of increased investment and higher consumption. This would enhance the country’s growth prospects and public finances and improve the external position.
For me everything is moving in the right direction; the early signs are positive
Shannon Bold
So, what is needed to trigger this sudden lift-off? Bold agrees that people need to see stability in the GNU, concrete progress and continued accelerated structural reform momentum — and the evidence showing up in the economic data.
In short, everything would need to go right.
That includes the behaviour of the US Federal Reserve and the outcome of the US election, added former Reserve Bank deputy governor Kuben Naidoo at the conference.
He says South Africa could even achieve 3% growth as early as next year, but not if inflation in the US proves sticky because Donald Trump becomes president and slashes taxes and hikes trade tariffs.
In that case, the Fed would be unable to cut rates and the dollar would remain strong, undermining the rand and upending South Africa’s rate-cutting hopes. Then domestic growth would probably only hobble along at between 1% and 2%, says Naidoo.
Sanlam Investments chief economist Arthur Kamp also says the GNU has the potential to pull the economy from its decade-long “doom loop” and enable growth to recover towards 2%-3% over the medium term.
“While the domestic macroeconomic outlook will be heavily influenced by the inflation and interest rate steer from the US and other developed markets, the country’s GDP growth picture will be influenced by the ability of GNU partners to find common ground ... and their commitment to economic reforms,” he says.
“If the government can emulate its electricity successes in transport and other critical areas of the economy and implement its reform programme successfully, it may yet reignite foreign capital inflows.”
This matters, because if South Africa continues on its current GDP trajectory, unemployment will top 40% by 2035, he predicts, whereas if it grows at 5% a year, it can reduce unemployment from the mid-30s to about 20%.
National Treasury director-general Duncan Pieterse told the BER conference that the GNU has already delivered positive results on several fronts, including by reducing bond yields and debt service costs. This means the country is on track to achieve its fiscal targets this year and to get debt to stabilise in 2025/2026 as planned.
But for this improvement in bond yields to be sustained, South Africa will have to deliver on its fiscal targets and promised structural reforms, he said.
The Treasury’s focus is to pursue fiscal sustainability, implement structural reforms and dramatically improve infrastructure investment — not just the amount being spent but also the delivery and financing of this investment by the leveraging of private sector resources.
The Operation Vulindlela delivery unit has provided a successful blueprint for how the public and private sectors can work well together. In addition, the Treasury has initiated a raft of reforms of the public finance regime while strengthening institutional and governance arrangements to make it more attractive for the private sector to co-invest in public infrastructure.
“These efforts will generate more fiscal space by increasing revenue and, by enabling private sector participation, lead to more productive public spending on infrastructure and create a virtuous cycle that supports inclusive economic growth,” said Pieterse.
In short, the stars are aligning for South Africa to break out of its growth trap. The country may not have such a propitious opportunity again for a long time. It needs to seize the moment with both hands.
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