JOHANN ELS: A new dawn for SA’s economy

As we reflect on the recent election outcomes and the newly appointed cabinet, I’ve long argued that SA is poised for better underlying economic growth over the coming years, a view that diverges from the prevailing pessimism before the elections. Despite the many challenges we face — from potholes and load-shedding to high unemployment and the risk of social unrest — the potential for positive transformation is substantial. 

One key driver of this optimism is the ongoing “radical economic transformation”, not in the negative sense associated with the Zuma era, but rather through the increased involvement of the private sector. This shift, which I’ve termed “privatisation by stealth,” has seen the private sector take on roles traditionally held by the state such as energy generation and logistical management, without the formal sale of state-owned enterprises. This transformation is already making significant strides in sectors such as electricity generation and railway operations. 

The policy reform in 2022 allowing private entities to generate unlimited electricity stands out as a monumental economic reform in SA’s history — second only to the transition from apartheid to democracy. This reform will drive future economic growth, leveraging SA’s robust institutions, including a strong constitution, an independent judiciary and a resilient financial sector. When comparing SA to other emerging markets such as Argentina, Brazil and Turkey, it is clear that we are far from being a failed state. Despite numerous failings in government functions and state-owned enterprises, our strong institutions and political stability set us apart positively.

SA’s existing positives provide a solid foundation for this growth. Our strong institutions, such as the Reserve Bank and the Treasury, ensure a stable economic policy environment. The robust constitution and independent judiciary uphold democratic principles and the rule of law. Moreover, our political democracy, with entrenched rights and a free media, fosters transparency and accountability. These factors contribute to a favourable environment for foreign investment, especially when compared to other emerging economies. 

The recent election outcome, resulting in a government of national unity, has reinforced these positive attributes. The coalition’s commitment to constitutional principles, judicial independence and institutional integrity bodes well for future governance and policy implementation. This new government structure is likely to accelerate fiscal consolidation and enhance economic growth, making it easier to manage the budget deficit and debt ratio. 

A crucial element in this positive outlook is the role of confidence. Historically, there’s a strong correlation between confidence and economic growth. The Bureau for Economic Research at Stellenbosch University highlights this link through its political climate index, showing that political concerns have adversely affected sentiment and growth since 2008. The new government, welcomed by the markets, has already spurred a rally in the stock market and a strengthening of the rand. 

Looking ahead, I maintain my forecast for medium-term economic growth to rise from the pre-Covid average of 1% to around 2.5%. I have now even more confidence in this forecast. With ongoing policy formulation and implementation we can realistically aim for growth rates approaching 3% or more. This trajectory, significantly better than the 1% we’ve endured in the recent past, will boost business pricing power, consumer spending, and investment, creating a positive economic cycle. 

The improvement in SA’s economic outlook is already reflected in the currency markets. The rand has shown signs of recovery, and I expect this trend to continue. While exchange rate forecasts are inherently uncertain, the rand’s current undervaluation suggests a potential for significant strengthening. Historical trends support this view, as we saw during the Covid-19 lockdown when the rand rebounded strongly from R19/$ in April 2020 to R13.50 by June 2021. My model suggests the fair value for the rand is around R11.60/$, and while reaching this level may be optimistic a significant rebound to a R14-handle or even a R13-handle is plausible in the short term. 

This expected strengthening of the rand will only partly be driven by improving domestic conditions. The anticipated US rate-cutting cycle and a shift towards risk-on sentiment among international investors will likely soften the dollar, benefiting the rand. A stronger rand, coupled with reduced load-shedding, lower inflation and lower interest rates, will bolster confidence among consumers, businesses, and investors, underpinning economic growth. 

The enhanced role of the private sector in the economy, coupled with ongoing private sector initiatives in other areas such as operating ports and railways, will enhance efficiency and productivity across the economy. 

Despite these positive developments, significant challenges remain. Structural constraints, such as an underperforming education system, a regulated labour market and logistical issues will continue to impede growth. These issues need to be addressed comprehensively to unlock the full potential of the SA economy. However, the progress being made in addressing some constraints provides a solid foundation for sustained improvement. 

As we move forward it is crucial to maintain momentum in implementing these reforms and addressing the remaining structural issues. This will require continued collaboration between government, the private sector and other stakeholders. The positive market response to the new government is a testament to the potential for growth and stability. The stock market rally and the strengthening of the rand are early indicators of the confidence investors have in SA’s future. This confidence, if sustained, will drive further investment, economic growth, and job creation. 

The future looks brighter for SA’s economy. The recent election has paved the way for a more effective and inclusive government, poised to implement the necessary reforms to drive economic growth. The increased involvement of the private sector, coupled with strengthened institutions and improved confidence, sets the stage for a period of sustained growth and stability. While challenges remain the progress made thus far gives us reason to be optimistic about the future.

• Els is group chief economist at Old Mutual SA.