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Predictions that the South African economy will start growing again are proving correct

Natale Labia
By Natale Labia
30 Jul 2024
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Has the tide finally turned on the South African economy? While early days, it seems that the new business-friendly coalition government has wrested back control of economic policy from the suffocating clutches of Luthuli House. Investors are cautiously optimistic.

The market indications are clear. First, South African government debt has been a winning investment since the change of government. South African bonds have already returned a world beating 9.3% in dollar terms this year, more than any other local-currency sovereign debt. According to Bloomberg data, the average return for other similarly rated emerging markets have been a miserly 0.1%.

The yield on the benchmark 2035 South African government bond has dropped about 140 basis points since the election in May, to abouyt 11% (bond prices move inversely to yields). After a hiatus of several years when South African bonds were ignored by foreign buyers, offshore investors finally seem to be moving back into the market. They have been net buyers of the nation’s debt to the tune of R23.4 billion ($1.3 billion) this year — on track for the largest annual inflow since 2019, according to the JSE.

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Foreign exchange markets have also cheered the change in government. While less pronounced than the shift of investor sentiment in the bond market, the ZAR is almost 5% stronger against the USD since its pre-election weakest point in April when it passed the R19 to the dollar level. It has since hovered below R18.5.

Equities, too, have seen a measured rebound. The JSE Top 40 is up 11.14% since mid-April, compared with only 8.25% for the MSCI Global benchmark. Even more indicative is its July performance compared with global indices. While stock markets globally have seen a sudden drop this month with the MSCI World down a sharp 3.24%, the local South African bourse is only down 1.14%.

Why SA will start growing again


Clearly, investors are pricing in a return to solid, if unspectacular, economic growth. As argued in this column in May it is possible, perhaps even likely, that “this could be the year which goes down as the moment the South African economy turns the corner and starts, albeit slowly and off a low base, growing again”. Simply put, given the polycrises that South Africa has faced over the past five years, it cannot get much worse. 

Apart from the positive political news, other indicators are looking up. South Africa has gone more than 100 days without power cuts after record blackouts last year that crippled the economy. A plan to use gold and foreign exchange reserves to cut the budget deficit has lowered the government’s debt-service costs and improved the fiscal outlook. 

Inflation and monetary policy are also moving in the right direction. 

Futures market indications of South African inflation have dropped to the central bank’s target point of 4.5%, reinforcing bets for a policy easing cycle to begin in September. Forward-rate agreements that capture the September meeting show that traders are fully pricing in a quarter-point cut. Monetary easing would have an exponential impact on highly indebted consumers and businesses. Things, potentially, are falling into place. 

The critical measures needed for faster growth


However, if the economy is to move from merely recovering to regaining the high-water mark of the post-apartheid era – the period from 2004 to 2008 when it consistently exceeded 3% GDP growth per annum, even hitting more than 5% in 2005 and 2006 – two things are needed.

First, the South African Reserve Bank (SARB) needs to do more. Market expectations are for three to four 25 basis point interest rate cuts over the coming 12 months. Should inflation materially subside that course of monetary policy would lead to restrictive monetary policy in real terms. The SARB must consider half a percent cuts.

This would not be out of line with other central banks. The ECB has already started easing, and all expectations are that the Fed will also start cutting in September. Cutting alongside other central banks will minimise any potential weakness in the rand, limiting the chance of a resurgence in inflation. Courage from Reserve Bank Governor Lesetja Kganyago is required. He should use his renewed support base within the coalition government to deliver what the South African economy and consumer desperately need.

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Second, and more difficult, are the longer-term structural reforms the economy requires to move back to a higher growth trajectory. It is not controversial as to what these are, indeed many were elucidated in President Cyril Ramaphosa’s State of the Nation Address. Transnet and Eskom need to be resuscitated and liberalised. The process for work visa applications needs to be streamlined. Regulations for public-private partnerships and foreign investment need to be simplified to make South Africa once again a magnet for investors.

With functional state-owned entities, dependable power supply and a resurgence in foreign direct investment, GDP growth in excess of 3% should be possible. None of this is unattainable nor controversial.

Should these pieces of the puzzle fall into place, and with the proviso that the rest of the global economy does not plunge into recession, expect improving prospects for South African workers, business owners and investors. It is not asking too much. 

We live in hope. DM

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