I was in London seeing fund managers last week and they wanted to talk about three issues: the SA Reserve Bank’s desire to lower the inflation target; the stability and durability of the government of national unity (GNU) after the drama of the thrice tabled budget this year; and SA’s GDP growth, or lack thereof.
Talking to foreign investors is a useful exercise. We typically have an hour-long conversation and this leaves little room for discussions outside what are the most important opportunities, threats and frustrations for investment in SA. From the list above the inflation target change was considered the opportunity, the potential demise of the GNU a threat, and growth disappointments a frustration.
For much of the Ramaphosa administration, starting in 2018, the most important investment topic has been SA’s push for growth reforms. It is widely acknowledged that this country’s growth potential is huge, that the government’s reform agenda is solid, and that the right things are being done to unlock economic activity. Herein lies the great investment opportunity for this country.
However, for reasons both local and global growth remains elusive. GDP looks set to grow at a rate below 1% for the third year in 2025. This in an environment where emerging and developing countries are forecast to grow by just under 4%. SA’s low growth stronghold refuses to ease, and this inertia is a point of real frustration for people who would love to love this country and need a signal to invest in it.
The emergence of the GNU post elections in 2024 buoyed sentiment, with many hoping this wider coalition would welcome new ideas and bolster momentum for reforms. The sell was also that the GNU was better than alternative coalitions, which included parties whose agendas were potentially damaging to investor interests.
To the extent that this coalition appears to be struggling to work together, many question whether it can indeed deliver meaningful change on policy and policy implementation. Moreover, the risk that the coalition collapses, potentially opening up opportunities for parties like the EFF and/or MK to enter the government, also gives investors pause.
That the best reason to invest in SA is the potential lowering of the inflation target is troubling. Lowering the inflation target by 1.5 percentage points will not lift potential growth in any meaningful way. In fact, the short-term growth costs, though small, could be negative.
An investor gains insofar as inflation expectations fall, raising the real rates in government bonds. This is only a short-term opportunity and not the long-term investment that would be unleashed by better growth prospects. For more durable investment inflows SA must grow, and do so sustainably.
International investors typically compare SA with other emerging markets, and within the peer group SA is a growth laggard. The factors that continue to support investment, including monetary policy credibility and somewhat disciplined fiscal policy, are in the realm of sound macroeconomic policy management. These are necessary but, as we have seen in recent years, not sufficient to deliver the growth that the country needs and wants.
Moreover, the low growth environment has made it increasingly difficult to deliver macroeconomic stability. We have in the National Treasury and Reserve Bank two institutions that have done much of the heavy lifting to support investment inflows in the past decade of suboptimal growth, but the runway on this is not unlimited.
That the GNU appears shambolic, reforms slow and growth mediocre will corner SA in a short-term investment inflow trap. Conversations with offshore investors suggest this is exactly where we find ourselves. We must break out of this trap.
• Lijane is global markets strategist at Standard Bank CIB.
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