Outlook for the SA economy

While investor sentiment and domestic confidence have improved post the national elections, ongoing structural reforms and growing fixed investments remain critical for long-term prosperity.

The formation of the 10-party Government of National Unity (GNU), representing about 70% of voters, could be the best possible outcome for the economic future of the country. The re-election of President Cyril Ramaphosa for a second term has ensured policy continuity, while the formation of the GNU boosted international investor sentiment toward South Africa.

Deloitte reports that a consequence of the above is that, from the end of February 2024 up to the end of September 2024, the country’s sovereign risk premium improved from 327 to 240 basis points. South Africa’s 10-year bond yield also decreased to below 10%. The rand appreciated to its strongest level against the US dollar in almost two years in September 2024, and the JSE experienced its strongest third quarter in more than a decade.

By the end of November 2024, South Africans enjoyed more than 230 successive days of continues electricity supply, following years of intermittent power outages, and many other structural constraints in sectors such as transport and logistics, which had hampered economic activities.

This has helped boost confidence on the supply side of the economy. The Absa purchasing manager’s index increased to 53.3% in September and stayed positive in October at 52.6%, while the Rand Merchant Bank/Bureau for Economic Research business confidence index reached its best result (38 index points) in almost two years in the third quarter of 2024, improving to 45 points in the fourth quarter.

Economic growth by sector

Year on year, the first six months of 2024 saw the economy expand by a measly 0.5%. Gross value added from manufacturing contracted by 0.7%, compared with the first six months of 2023. These numbers did recover in the second quarter of 2024, growing at 1.1% quarter on quarter.

The mining sector was reasonably stable, contracting by 0.1% over the first half of the year, with constraints from rail and port inefficiencies undermining the sector. At quarter-on-quarter and seasonally adjusted rates, value-added numbers from this sector saw declines in both the first and second quarters of 2024 of 1.7% and 0.8%, respectively.

The trade, catering, and accommodation sector, as well as the finance, real estate, and business services sector, saw a positive first six months of the year, while transport, storage, and communication showed negative growth over the same period. Overall, after 0% real gross domestic product growth in the first quarter of 2024, second-quarter values improved by 0.4%.

Expected economic growth

Economic growth is expected to improve somewhat in the last two quarters of 2024, particularly due to domestic factors like no loadshedding, reduced inflation, and lower interest rates. While domestic factors have a direct impact on the country’s economic outlook, so too does the economic health of its trade and investment partners. SA is a trade-dependent economy: the value of its goods and services trade was equal to 66% of GDP in 2023 versus a global average of 63%. PwC predicts real GDP growth for South Africa of 0.8% for 2024, improving to 1.3% in 2025.

Inflation

Consumer price index (CPI) inflation decreased to 4.4% in August. A further reduction to 3.8% in September and 2.8% in October was mainly due to the strength of the rand, falling fuel prices, and slowing food price inflation. PwC expects the CPI to end the year at 4.7% with a reduction to 4.6% by the end of 2025.

Interest rates

The decline in inflation rates saw the South African Reserve Bank start a rate-cutting cycle in mid-September 2024, reducing the repo rate by 25 basis points and again in November 2024. Further rate cuts are expected throughout 2025.

Medium-Term budget

The Medium-Term Budget Policy Statement (MTBPS) delivered on October 30, 2024, by Finance Minister Enoch Godongwana, brought no quick-fix solution to the country’s economic growth challenges. The MTBPS reconfirmed the government’s stance toward fiscal consolidation and stabilizing public debt.

The government has committed to anchor fiscal policy by targeting a primary budget surplus for the rest of the current decade, with the primary budget surplus achieved in fiscal year 2023 to 2024 being the first in 15 years.

Planned structural reforms

Various plans have been set in motion by Government to address supply-side constraints via the reform program, Operation Vulindlela (OV), launched in 2020. The first phase of the program focused on sectors including energy, rail, water, and telecommunications. In the first phase, reforms under OV have attracted over 390 billion rand in investment in the energy sector.

While faster implementation of such reforms will contribute to boosting confidence and unlocking fixed investment, government is also looking at new ways to attract private sector investment for public sector projects. Focus is on project preparation and creating a pipeline of bankable projects, strengthening public-private partnerships (PPPs) through reforming their frameworks, as well as using risk-sharing initiatives and financial instruments to unlock greater private funding.

While the economy has been struggling to recover from the damage caused by state capture and the COVID-19 epidemic, there are growing positive signs that National Government is serious about building partnerships with the private sector to expand infrastructure in order to boost economic growth and lower the unemployment rate, something that is desperately needed for social cohesion and stability.

The information contained in this article is of a general nature and intended for information purposes only. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial, legal or other issue. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner/adviser to take into account your particular investment objectives, financial situation and individual needs.