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Summary
- South Africa’s shift to coalition politics has brought optimism over renewed reforms and potential for a much-needed acceleration in growth.
- But difficult decision making in the 11-party GNU alongside huge structural challenges leaves high implementation risks ahead.
- Improved energy supply with loadshedding suspended since March, and progress on logistics, suggests earlier reforms are also bearing fruit.
- We think South Africa’s macro backdrop has improved, though concerns remain about fiscal risks and C/A deficit.
Market Implications
- ZAR outperformed high beta peers like MXN, BRL and HUF in the recent market turmoil. This came despite crowded positioning.
- If broader risk sentiment stabilizes, ZAR could rebound quickly. SARB’s forthcoming easing cycle is likely to be shallow, leaving real yields in positive territory.
Structural Challenges Alongside Key Strengths
South Africa has one of the highest public debt levels in EM (73.9%), one of the highest unemployment rates (33%) and among the lowest growth rates (0.8% average for the last decade).
But South African bonds outperformed the rest of EM following the general election. And the rand fared better than its high beta peers like MXN, ZAR and HUF in the recent market turmoil.
We are optimistic on the ZAR’s outlook thanks to South Africa’s deep capital markets, a positive net foreign asset position, strong institutions outside the inefficient SOEs and the new coalition government’s commitment to address structural constraints.
ZAR’s high yielder status and improved domestic political and macro backdrop are reasons to be bullish. It will not insulate South Africa from recent market volatility. But reduced vulnerability compared with earlier periods of global market stress should limit spillovers. Medium term, the new government’s capacity to deliver will determine whether earlier strong performance can be sustained. Next year’s local elections will be key to gauge the longevity of the 11-party coalition.
New Government, New Implementation Risks
An 11-party Government of National Unity (GNU) leaves South Africa with a unique opportunity to turn its economy around. The African National Congress’s (ANC) pragmatic approach to its historic defeat at the 29 May general election means South Africa’s cabinet now represents seven parties. While party priorities differ, greater focus on stopping corruption and improving education and infrastructure indicate a renewed reform drive. Whether this new era in South African politics can end the low growth, high unemployment of the past is uncertain. But we are cautiously optimistic the macro backdrop will improve.
President Cyril Ramaphosa, re-elected by a comfortable margin at the first sitting of parliament, remains popular. ANC’s Paul Mashatile was reappointed as deputy president, and overall, economic ministries remain with the ANC. Enoch Godongwana was reappointed as finance minister while trade and industry, electricity and energy, employment and labour, and higher education are among the 20 ministries the ANC still holds.
Versus the 40.2% vote share won in the general election, down from 57.5% at the 2019 election, the ANC retained almost two-thirds of ministerial positions (Chart 1).
The Democratic Alliance (DA) secured six cabinet positions, alongside six deputy minister positions (including second deputy minister of finance). DA leader John Steenhuisen is now Minister of Agriculture. The Inkatha Freedom Party (IFP) has two cabinet positions, cooperative governance and traditional affairs now held by the party leader, and public service and administration.
Freedom Front Plus (FF+), Patriotic Alliance (PA), Pan Africanist Congress of Azania (PAC) and GOOD all secured one cabinet post. Of the remaining four parties (Al Jamma-ah, Rize Mzansi, United Democratic Movement (UDM) and United Africans Transformation (UAT)), UDM and Al Jamma-ah each have a deputy position.
The 11 parties in the GNU account for 278 seats in the 400-member parliament, leaving a majority of over 70% (Chart 2).
Chart 1: blue bars = ANC vote in national elections, orange bars = local elections. Chart 2: yellow section = ANC seats in parliament, blue = DA seats, dark grey = IFP, light grey = PA+GPPD, orange = other GNU, green = MK, red = EFF, blue striped = other parties.
Campaigning ahead of the 2026 local elections – and whether the parties campaign with or against each other – will give key insight into the GNU’s viability. Barring political noise in KZN and Gauteng, so far so good. The first strategic planning session to outline priorities over the next five years produced no major obstacles. The coalition broadly accepted South Africa’s fiscal and macroeconomic outlook, according to Godongwana, although detailed spending allocations could yet be more contentious.
Sufficient Consensus
Sufficient consensus is the principle outlined in the GNU’s statement of intent in a situation where no consensus is possible. This is defined as 60% of seats in the National Assembly. Given the GNU has more than 70% of the seats there is a decent buffer to achieve sufficient consensus.
Ramaphosa talked of rebuilding South Africa in his opening address to parliament. Strategic priorities were listed as i) inclusive growth and job creation, ii) reduction of poverty and the high cost of living, iii) building a capable, ethical and developmental state. However, he did not elaborate on how these things would be achieved.
A broader list of needed reforms includes fiscal, product markets, labour market, governance and climate reforms (Table 1). Without reigniting growth, South Africa will struggle to sustainably address these issues. Key to this is addressing the energy crisis that peaked in South Africa last year.
Electricity Crisis Now Much Improved
Record blackouts in 2023, despite last year’s debt relief and earlier cash injections for state-run Eskom, have clouded South Africa’s growth and investment prospects. The country’s reliance on coal to generate around 70% of its energy leaves substantial environmental risks as well as dependence on Eskom’s 15 aging coal-fired power stations. Poor governance at Eskom, unpaid municipality debts, electricity theft and crumbling infrastructure are some of the factors adding to the earlier loadshedding, or power outages.
2024 has seen a marked turnaround in loadshedding. Power supply has been uninterrupted since 26 March – now 135 consecutive days – most happened during the country’s winter. This is the best performance in more than four years with loadshedding last suspended for 116 days between 16 March 2020 and 9 July 2020.
Eskom’s Energy Availability Factor (EAF) has also improved markedly. This reached 71% over the seven days reported through early August and has exceeded 70% several times in recent weeks. Before reaching 70.78% in May, the EAF had been below 70 since August 2021. Achieving the 70% threshold was a key part of Eskom’s Generation Operational Recovery Plan.
South Africa’s improved energy situation looks to be a combination of increased supply and reduced demand. Private sector generation has reduced demand while the earlier maintenance-led recovery plan is starting to pay off. Wind power has surged during recent years, now accounting for almost 12% of the energy mix. Solar is another important contributor with installed photovoltaic power up sharply in recent years (Charts 3 and 4).
Chart 3: blue line = electricity generation (terawatt-hours), orange line = wind, black line = solar, grey line = nuclear, blue dotted line = hydro. Chart 4: blue area = coal share of total energy supply (70.1%), orange = oil (18.1%), green = biofuels (4.8%), light blue = natural gas (2.9%), purple = nuclear (2.6%), light green = wind, solar (1.4%).
That around 70% of South Africa’s energy supply comes from coal is an environmental and economic issue (Chart 4). Transition towards a more sustainable and cleaner energy mix has been amplified given problems at Eskom’s aging power stations. But already elevated unemployment (32.9%) and inequality (Gini coefficient of 0.63) leaves South Africa among the ten most unequal countries globally. Managing decarbonisation must balance the impact on jobs and the environment.
While loadshedding has ended for now, load reduction continues. Eskom attribute this to ‘illegal connections, vandalism, meter tampering, and equipment theft’, which overloads the network, leaving potentially lengthy unplanned power disruptions.
Load reduction alongside the relatively slow energy transition (partly related to the social fallout from the 2022 shutdown of the Komati power station) and Eskom’s crumbling infrastructure and earlier poor governance means loadshedding could return. Nevertheless, with increased private sector power generation and earlier reforms, the energy supply is now much improved versus 2023.
Fiscal Risks Reduced, but Still Elevated
Bailouts at Eskom have weighed on South Africa’s already fragile fiscal position. Debt/GDP at 73.9% in FY23/24 leaves South Africa with the sixth highest debt level in emerging markets (Chart 5). The run up has been particularly rapid with a 22.5pp increase since 2018/19. Higher debt servicing costs are another factor in the wider deficits of recent years, with the primary balance until recently in deficit for over a decade. Low growth – the result of energy shortages, logistics constraints, ToT deterioration and weakness in key trading partners (particularly China) has also weighed heavily on revenues (Chart 6).
Successful fiscal consolidation hinges on tax reform, alongside higher effective tax rates, and expenditure restraint. Given the country’s elevated investment needs alongside required social spending and climate-related costs, spending restraint remains difficult. This also highlights the need for growth-enhancing reforms.
South Africa has achieved an important milestone in debt stabilization with its first primary fiscal surplus in 15 years (FY2023/24, Chart 7). Planned debt stabilization was also brought forward in the 2024 budget – from 77.7% in FY2025/26 to 75.3% – with drawdown of the SARB’s Gold and Foreign Exchange Contingency Reserve Account (GFECRA). This unrealised liability on the SARB’s balance sheet will be transferred to the Treasury over three years, with the frontloaded schedule reducing interest costs and allowing faster fiscal consolidation.
Chart 5: blue bars = public debt (% GDP, WEO definition). Chart 6: blue line = expenditure (% GDP), orange line = revenues.
South Africa’s deep local market, and reduced share of non-resident holdings, leaves financing risks contained. Nevertheless, this means ever greater exposure of the banking sector to finance the government. With no new measures to improve growth in the 2024 budget, the onus is on the new government to kickstart the economy.
A binding fiscal rule would be an important signal of commitment to faster fiscal consolidation. So far, the primary surplus remains the main anchor for fiscal policy / debt stabilization. But a more formal rule potentially including a debt ceiling, primary balance target and improved budgeting would be investor friendly.
Chart 7: blue bars = primary balance (% GDP).
Overall, fiscal risks persist despite the tapping of GFECRA and the improved energy situation. And spending needs remain elevated and without accelerated growth fiscal fragility will remain.
Clawing Out of a Lost Decade
Average GDP growth over the past decade at just 0.8% highlights South Africa’s huge structural challenges. EM average growth over this period stands at 4.0%. Activity in recent years has been constrained by a combination of energy shortages, disruption in the logistics / transportation sector, high cost of living, poor governance and weakness in China (South Africa’s top export market), and deteriorating ToT. Weak growth exacerbates the already-limited fiscal space while insufficient job creation leaves unemployment and poverty exceptionally high.
South Africa’s economic structure is also adding to the growth and employment challenges. A rising share of the tertiary sector over the past 15-20 years has not created jobs for lower skilled workers. While manufacturing has shrunk, lower-valued added agriculture has remained broadly unchanged.
Mining has also been significantly impacted by the crisis in the energy and logistics sectors. Lower ToT is an added drag. In QoQ terms, the sector has contracted in seven of the past nine quarters, weighing on GDP growth. 10 out of the 12 mining subsectors saw lower production in Q1 with platinum, coal, gold and some subsets of ore particularly weak.
Regarding demand, recent weakness has been broad based with all components contracting in Q1. The QoQ decline of -0.9% was partly the result of a 0.5pp drag from destocking. Net trade has contributed positively to GDP growth in recent quarters, reflecting deep declines in imports rather than strength in exports (Chart 8).
Weak consumption reflects declining real disposable income with inflation remaining high, while consumer confidence remains well below the long-term average, albeit improving in recent months. Business confidence is also gradually improving with the 6m ahead expected business conditions index rising to its highest level in more than two years in July (Chart 9).
Chart 8: orange bars = contribution to growth from net trade (pp), blue bars = domestic demand, grey line = GDP 9% YoY. Chart 9: blue line = consumer confidence index, orange line = business confidence.
Modest acceleration in growth is expected, particularly with the suspension in loadshedding. Policy uncertainty ahead of the May general election could weigh on growth in Q2. But medium term, reduced fiscal risks and actions to address the crisis in energy and logistics are significant positives.
The new government’s commitment to renewed reform has also benefitted investor sentiment. But successfully implementing reforms, especially to upgrade infrastructure, improve provision of basic services, reduce corruption, remove barriers to business and investment, and adapt the education system to provide necessary skills will determine how much growth can accelerate.
SARB forecasts see a gradual acceleration in growth to a still modest 1.1%, 1.5% and 1.7% over 2024-2026. Consensus forecasts are marginally higher with 2023 at 1.9%. The outlook for China and the US, South Africa’s two biggest export markets, will impact the growth outlook. Domestic risks are also manifold given exposure to climate shocks, potential for renewed problems in electricity generation and logistics, and still-high fiscal vulnerabilities.
New, Lower Inflation Target Remains Some Way Off
South Africa’s high cost of living is often cited as another reason for the low growth environment. Household consumption is up just 3% from the pre-pandemic peak and real incomes have been eroded by inflation remaining at about the target’s midpoint since 2021 (Chart 10). Still-elevated inflation is keeping the policy rate at its highest level since 2009.
Narrowing South Africa’s 3-6% inflation target has been under discussion for some time. But with inflation above target, the timing has been pushed out. Governor Lesetja Kganyago, whose term was recently extended another 5 years, has for several years stated his preference for a 3% target, with a likely 1% tolerance band either side. A lower inflation target should help lower inflation expectations (also above the band’s midpoint since 2021, Chart 11). But any change to the inflation target before the current target is met risks undermining the SARB’s credibility.
While inflation in South Africa has been above target, unlike central Europe it did not reach double digits (peaking at 7.8% in July 2022). Transport was the main contributor (accounting for almost half) while food and housing / utilities were the other drivers. The peak in core inflation was in April 2023 at 5.3%.
June’s 5.1% YoY CPI print was the lowest reading YTD. On a YoY basis, the main contributors were housing, food, transport and other goods and services. Food prices are now at their lowest in four years, with the YoY rate at 4.1%. However, unlike many other countries South Africa did not see elevated services inflation. Services inflation has generally been lower than that for goods, with the latest data at 4.6% for services and 5.5% for goods.
Risks to inflation include food prices, particularly given weather risks, and more recently rental inflation. Inflation projections were downgraded in the last MPC meeting with CPI now projected to dip below target in H2 2024 and H1 2025. Meanwhile, risks to the forecasts were shifted to the upside, versus the earlier balanced view. Core inflation forecast remains broadly unchanged with the SARB expecting a gradual drop back to 4.5%.
Chart 10: blue line = headline CPI (% YoY), orange line = core inflation, black line = midpoint of the inflation target. Chart 11: blue line = inflation expectations current year, orange = 1-year ahead, grey line = 2-years ahead, black line = midpoint of the inflation target.
Counting Down to SARB Rate Cuts
Inflation closer to the target’s midpoint and improved inflation expectations are needed for the SARB to ease policy (and eventually change the inflation target). Should the Fed cut in September, this will also bring forward the likely date for SARB easing (the next SARB meeting is the day after the Fed). Stable-to-improving risk perceptions, and associated rand strength, will also matter. That domestic political risks are much reduced versus earlier in the year will help. But the recent market turmoil will heighten SARB caution.
When SARB cuts come, we expect the easing cycle will be shallow and real rates remaining firmly positive.
Strong External Position Despite C/A Deficit
South Africa’s persistent C/A deficit over the past two years reflects normalisation from pandemic-related disruption. Deteriorating ToT following the March 2022 Russia-related spike is another factor. The composition of the C/A shows the trade surplus normalising to the current 2.0% GDP from a high of almost 10% in Q2 2021 as imports halted.
Services and transfers have changed little over recent years with both components running small deficits. Income outflows have improved slightly, albeit remaining around the historical average of -2.5% GDP. This component is nevertheless volatile, reflecting dividend outflows from foreign-owned companies.
Chart 12: orange line = C/A (% GDP), blue line = trade balance, grey line = ToT (rhs). Chart 13: orange bars = trade surplus (% GDP), blue bars = services, grey bars = income, white bars = transfers, black line = C/A.
Continued China weakness contributes to the shrinking trade surplus. China is South Africa’s largest export marrket, accounting for 11.2% on total exports last year (Chart 14). The US, Germany and Japan are the next largest export destinations.
Import growth exceeded that of exports for much of 2022 and 2023 with only more recent quarters showing a turnaround with oil prices turning negative YoY (Chart 15). Without any significant rebound in China, it is difficult to see any material shift in South Africa’s trade surplus and overall C/A position. Given the country’s large investment needs, a S-I approach to the C/A also suggests continued deficits ahead. SARB forecasts project the deficit gradually widening from last year -1.6% to -3.1% by 2026.
Chart 14: blue bars = country share in South African exports (% total). Chart 15: blue line = exports (% YoY), orange line = imports.
On ToT, higher gold prices (up 37% over the past two years) has been insufficient to offset higher import prices. Palladium prices are down 70% from the 2022 high, while coal prices are also down. On imports, import prices have risen faster than export prices since Q4 2021 (YoY basis), with the sharp rise in oil prices through 2022 part of this. That the rand weakened through 2022 and 2023, and did not sustainably reverse the March 2020 pandemic-related spike (-26% between January 2020 and early April), added further upward pressure to import prices.
Financing the modest deficit should remain comfortable. FDI has trickled in with the last five years averaging 0.8% of GDP p.a. Government-led reform progress could increase this.
Portfolio flows have financed a smaller share of the deficit in recent years (since 2022, South Africa has recorded just two quarters of net portfolio inflows). Non-residents now hold just 25% of local debt versus a peak of almost 43% in 2018. Some of the decline reflects the rapid run up in the level of debt (with local banks now taking an increasingly large share), with the overall level of foreign bond holdings up 14% since January 2000. But as a share of GDP, overall debt investment liabilities have dropped around 3pp in recent years to 18.3% GDP.
Equity remains the larger component although this has dropped even more sharply in recent years. Net inflows have been recorded in just seven out of the past 54 months (since January 2020) and the amount was small relative to outflows. Similar to FDI, this could improve on reform progress. But this seems unlikely in the near term given concerns over US recession.
Net portfolio outflows and a basic balance deficit (narrow definition) do not raise concerns over South Africa’s C/A financing. Banking sector inflows are sufficient to cover the remaining finaning needs. While low FX borrowing and a 36% GDP net external creditor position (of which overseas equity holdings is a significant proportion) leave limited overall external vulnerabilities.
Equity and risk sentiment nevertheless drive rand dynamics. We are therefore cautious in the current environment but acknowledge the reduced domestic risk premium.
Chart 16: blue line = USDZAR (inverted), orange line = JSE Top 40 index. Chart 17: blue line = ToT, orange line = USDZAR (inverted).
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Caroline Grady is Head of Emerging Markets Research at Macro Hive. Formerly, she was a Senior EM Economist at Deutsche Bank and a Leader Writer at the Financial Times.
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