We’ve come a long way since the mid-year South African elections. In a year where incumbents lost power across the globe, creating a noisy and uncertain backdrop for many democracies, SA has emerged as a country with the ability to definitively change course in a positive direction. The backdrop is of course enormously challenging with multiple crosscurrents, but South Africans have a uniquely hard-won resilience that we’ve learnt should never be discounted.
Reflecting on 2024 and looking at the year ahead, investors need to consider many intersecting themes, loosely grouped into global and domestic drivers.
Global headwinds and uncertainties are extremely elevated. The re-election of Donald Trump, and the sheer unpredictability of the magnitude and sequencing of future US economic and geopolitical policies, and their likely impact on emerging markets, is almost impossible to accurately predict. What is clear is that all outcomes point to a significantly more challenging global backdrop for emerging market economies.
Domestic challenges, almost reassuringly, are broadly within our own control. As the Bureau of Economic Research aptly describes, SA doesn’t need ‘miracles or fairytale magic’ to achieve higher economic growth rates. We just need to put our heads down and implement the required structural reforms that we have already identified. Where are we on this structural reform journey?
The hopeful: The energy sector outlook is considerably brighter and has stabilised much faster than any of us had anticipated. A combination of political will, good leadership, well-crafted strategies and a focus on implementation together with a willingness to include the private sector as part of the solution have all played key roles in this success. Risks remain, but the trajectory is positive.
The tentatively hopeful: Logistics reforms are at a challenging juncture – plans are advanced, there is an agreement across role players on what needs to be done and new management at Transnet have started to make a difference in stabilising operations. The challenge is that a holistic view needs to be taken that solves the logistics sector problems as a whole, and not a view that merely stabilises Transnet as an entity – strong leadership at multiple levels will be required to ensure that this current juncture doesn’t become a cul-de-sac. South Africa can’t afford for this not to be taken firmly in hand.
The deeply concerning: crumbling water infrastructure across many key municipalities is a grave economic and social concern. Urgent intervention is required but the issues have been recognised and are receiving attention at both national and local government level, as well as through Operation Vulindlela. This is a very complex issue and one that will be a key area of investor focus in 2025.
Are there any green shoots? One barometer of how the outlook has brightened is that, in discussions just over a year ago, most scenarios discussed within investor meetings framed SA’s economic growth averaging around 1.5% over the long term, not enough to stablilise SA’s all important sovereign credit risk metric of public debt as a percentage of GDP. These fiscal risks were reflected in the ten-year government bond yield trading above 12% yield, with investors requiring significant compensation for debt sustainability risks. Today, if you pull the 2026 consensus growth forecast on Bloomberg, this now reflects 2% growth, with risks firmly to the upside. SA ten-year maturity bond yields are now trading closer to a 10% yield. Factors such as the GNU formation and no loadshedding for over 200 days are powerful confidence boosters – it will take some time for higher confidence to feed into actual (lagging) economic growth numbers, but some early indications we’ve been tracking are an encouraging improvement in confidence measures, such as the BER Business Confidence Index rising to a three year high in Q424 (the importance of the BCI lies in its strong correlation with private sector investment growth), and a range of other, forward looking confidence measures. SA’s economic growth recovery will be a marathon instead of a sprint – cyclical factors (such as lower inflation and easing interest rates as well as a temporary boost from the two pot pension reform) are likely to support the near term recovery and lift confidence, allowing time for the structural reform progress across the energy, logistics and water infrastructure areas of the economy, together with upside from growth enhancing visa reforms, to start to bear fruit.
Our Finance Minister, Enoch Godongwana, framed the recently Medium Term Budget Policy Statement with a strong focus on economic growth, sending the message that South Africa can clarify our multiple challenges by recognising we have a growth problem (and have had one for more than a decade) – simply put, if we have a growing economy, our other challenges (such as unemployment, poverty and unsustainable public debt levels) will also be solved. Structural reforms, at their core, are to remove bottlenecks in the economy to achieve this higher growth path.
Clearly, a stable political environment is required to enable the economic reform journey to take hold. In the very early days of the GNU, we need political maturity and cool heads, and dispute resolution mechanisms established and tested before public confidence will rise that we’re not one public spat away from a government collapse. We find it useful to think through this inevitable initial noise through what incentives the various parties have to remain engaged within the GNU – what cement holds the parties unified, as opposed to merely what myriad ways the parties may be at odds. Initial and ongoing disagreement over policy was always inevitable – by its very nature with a grouping of parties with very different opinions and powerful personalities. We draw comfort from the fact that the one issue that all parties support is Operation Vulindlela and the structural reform initiatives they pursue. Higher economic growth would be the shield that protects the GNU – if SA can lift economic growth and create desperately needed jobs, and simultaneously lift the standard of living of our citizens (through uninterrupted power supply, a well-functioning logistics sector and water security), political stability will inevitably follow.
Lesetja Kyganago, our esteemed Reserve Bank Governor, has an enviable way with words. As he recently described at a lecture in Stellenbosch, one can think of the potential growth rate of the economy as a speed limit that allows safe travel along a road. If you would like to drive faster along a bending road, you need to make changes to improve the road, like widening, or straightening, adding pedestrian bridges or animal gates to reduce obstacles, and generally improving the ability to carry more vehicles at a faster speed and in a safer manner. SA has the engineering plans in place to achieve this vision. Now SA needs to take the fork that leads to this significantly brighter higher growth road.
Article from Daily Maverick
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