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It’s been surprising to see the SA economy grow to the extent it has in 2023 given the energy challenges we have experienced. And the good news is that a positive catalyst may be on the horizon.

Among the cost pressures faced by companies, many cite the significant pressures stemming from their reliance on diesel to power generators to curb the impact of load-shedding on operations. While SA has evaded recession, the extent of load-shedding (and other pressures) is tantamount to recession-like operating conditions, particularly on the production side of the economy. This is probably why SA-listed entities in aggregate trade on a 12 times forward price-earnings ratio, a discount relative to history. 

The latest GDP data reveals that cracks are starting to show. GDP contracted in the third quarter, driven by steep contractions in agriculture, construction, manufacturing and mining. It is important to note that some aspects of the contraction in these sectors were driven by industry-specific factors as well as demand, which had adverse effects on economic activity. The electricity, gas and water supply industries recorded growth in the third quarter as we saw lower stages of loadshedding.

An ongoing priority for business has therefore been to cushion the effects of load-shedding that have been coming through in their earnings, as recent listed company results make clear. This highlights the extent to which business profitability is at risk. The goal of being a favoured global investment destination — one of the clear objectives of the president — is therefore also at risk. However, the extent to which load-shedding can be mitigated remains to be seen, and recent commentary about potential widespread job losses should worry us greatly.

For households, what scares us the most is the effect on school pupils and students who recently wrote final exams but may not have been able to study in a conducive environment. This will likely result in future productivity losses for the economy, let alone the other kinds of effect energy insecurity has on households. This is at odds with the level of investment in education of 6% of GDP. 

I recently wrote about the impact of education on GDP growth globally, mentioning that SA’s relative investment in education is inconsistent with the outcomes of that investment. Human capital development is lacklustre, and human capital is a foundational aspect of the productive capacity of the state. Human capital development enables self-actualisation, which can foster a culture of entrepreneurship, the real driver of employment in the country.

Gross fixed capital formation, essentially investment in infrastructure, is equally lacking. This leads me to the catalyst mentioned earlier. The SA business environment could go through a structural shift in the coming year or two thanks to the investment in alternative sources of power. Businesses have, to some extent, resuscitated and created a more conducive operating environment, improving their prospects for enhanced profitability.

The reduced burden of diesel costs, for example, could act as a cost-containment mechanism, implying that the markets may have unduly punished JSE-listed companies, for what may turn out to have been a one-off cost. If energy-related risks dissipate, government bond yields (the so-called risk-free rate) could fall, which would be positive for valuations. This implies that there is upside potential for SA Inc.

Alternative sources of energy are cheaper over the longer term, meaning production costs and producer inflation should both fall. The SA Reserve Bank is also traversing a new plane, in which it may soon have to decide when to cut interest rates. The combination of falling rates and falling risk premia would be a net positive for SA Inc. In addition, this would support household consumption expenditure (demand). This is important because consumer-sensitive sectors such as retail contracted in the second quarter.

Eskom has been improving in many respects over the last few months. The durability of the improvement remains to be seen though, and recent troubles are worrying. Equally, we cannot understate the importance of Transnet (rail and harbours in particular) as a catalyst in determining our growth outlook. Current issues, particularly regarding the 100,000 containers waiting at sea and kilometre-long truck queues in KwaZulu-Natal are of concern. As one radio presenter put it recently, SA is facing a “conflation of problems”.

The resilience of the SA economy can be ascribed to the relative investment of the private sector in alternative power. The causal link between investment and better outcomes, specifically in operational performance, is noticeable in the private sector. The state should take heed of this. Investment in productive capital must achieve its intended outcomes, and this can also reduce people’s reliance on social grants as they become enabled and equipped to participate in the formal economy. Expenditure on social grants can thus be used for greater investment in productive capital, also reducing wide-ranging disparities in the economy. The state should be a key actor in maximising GDP — and improving living standards.   

Bearing in mind the president’s vision on attracting investment, if the pieces of this puzzle all come together R2.5-trillion of investment in the next term is not outside the realm of possibility. This would then translate into economic growth, job creation and sustained progress in alleviating our problems and will result in a better life for all — a fine, lasting legacy for this administration.

• Mazwai is an investment strategist at Investec Wealth & Investment SA. 

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