As 2024 comes to an end we’ve had upbeat updates on SA from the three global ratings agencies and the IMF. All say the same, in varying degrees. SA has formidable challenges. But it also has an economy with significant strengths — one that has the potential to grow much faster if we stay on the path of reform and step up the pace. The government of national unity (GNU) gives us the opportunity to realise that potential. If we blow it, we will be in real trouble.
Going into the new year the IMF and other economists have lifted their forecasts at least a little, with confidence improving, electricity supply stabilising and interest rates declining. The IMF forecasts 1.1% growth this year, rising to 1.5% next year and 1.8% by the end of the decade in its baseline. Moody’s has similar numbers, with growth getting close to 2% as bottlenecks ease; S&P’s are more muted but still fractionally higher than they were a few months ago. The SA Reserve Bank now sees growth reaching 2% by 2027, up from 1.1% this year, about in line with the Treasury’s latest forecasts.
Then there are the scenarios, the “what if” pictures of the growth that could materialise if SA implements the whole package of reforms it has promised and accelerates the pace. Most notable is the Bureau for Economic Research scenario, now widely cited by the government and business, in which the growth rate gets to 3.5% by 2029 if SA successfully implements the whole range of reforms, from electricity and logistics to water, visas, greylisting, municipalities and the rest. PWC’s economists have an even more optimistic scenario in which we hit 3.3% as early as next year if we do all the right things.
Not that 3% is spectacular by emerging market standards, or even by the standards of SA’s own history. But it’s significantly better than the barely more than 1% a year that economic growth has averaged since 2009. If it were sustained it would make a meaningful dent in unemployment. At 3% economic growth the government’s debt problem starts to solve itself.
The best-case scenarios become a virtuous cycle in which ratings agencies upgrade SA and the risk premium narrows, lowering borrowing costs across the economy, with higher confidence filtering into higher fixed investment and improved productivity, all of which in turn sustain higher growth.
GDP shock
But the bubble was punctured a bit this week when the economy turned out to be contracting in the third quarter, not expanding as economists had expected. After a weak first half of the year everyone had expected a better second half. Not so. GDP data from SA’s official statistics agency show the relatively tiny agriculture sector plummeted by almost 30% to plunge the economy into the red for the quarter.
A year ago Stats SA first reported agriculture had declined by almost 10%, then had to revise it to a decline of 2% after it turned out the agriculture department had made a simple Excel mistake when it supplied the data. That meant the economy grew 0.7% last year, not 0.6% as originally reported — not a huge difference, but when you’re counting the growth decimals every fraction matters.
Perhaps there will be a big revision again. But economists have to work on the assumption the official statistics are correct. Several have already revised down their growth forecasts simply because after three weak quarters it’s numerically unlikely the economy can recover enough in the fourth to deliver the 1% many had pencilled in. Some forecasts for this year are now as low as 0.5% — worse than last year even though it was the one with the record load-shedding, not to mention the declining rail tonnages or the ports where Christmas imports couldn’t be offloaded in time for Santa.
Arguably, this week’s GDP shock was driven by just one sector and it doesn’t change the growth narrative. Next year will still be better than this year and the medium term could be even better, depending on how successfully the GNU presses ahead with fixing electricity and logistics and bringing in private investment. However, the GDP figures came as a sobering reminder of just how sluggish the economy really is. Even excluding agriculture, the other sectors mostly went sideways. Investment spending hardly rose. This is a diversified economy, with a strong, resilient private sector. But it’s unclear that it is even close to a strong growth narrative.
Look back to the start of this year and several economists, the Reserve Bank and Treasury included, had forecasts for this year which at 1.2%-1.3% were slightly better than the 1.1% they have now. And that was before we knew load-shedding would end in March, or that the election would result in a confidence-inspiring GNU outcome that was better than anyone in the markets expected. Now we have had all that good news and the economy is still stuck.
There’s a reason the economy has stuck at 1% or less: the government itself is stuck.
Of course, reforms are hard to do and take time to have an impact. And while there’s reason for the medium-term optimism, it could well be a stop-start process. Instead of a gradual but steady improvement to the growth rate, some economists — ratings agencies included — expect what the BER’s chief economist calls a “camel’s hump” shape in which the growth rate lifts next year off this year’s low base but then stalls in 2026 or 2027.
The scenarios put the pressure on by showing what is possible if the GNU government can get it together. But it’s not just about pursuing the usual list of reforms, but about the more fundamental challenge of getting government itself to function. There’s a reason the economy has stuck at 1% or less: the government itself is stuck. It’s a regulatory morass, a bureaucracy that is more about compliance than about efficiency or innovation or enabling growth.
Decisions are not made. Departments and municipalities that can’t do routine maintenance or pay bills aren’t about to have the capacity or competence to do large infrastructure projects or public-private partnerships. Nor is it easy to work around them, as the presidency and Treasury try to do. This is not an environment that makes it easy to invest and expand. Nor is it an environment in which energetic new reform-minded GNU ministers will find it easy to gain traction, whatever their politics.
Fixing electricity and transport, and delivering on other planned reforms, will help. But if SA is to realise its growth ambitions it is the state itself that needs fixing.
• Joffe is editor-at-large.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.