The South African Economy: An Overview since the GNU

There have been positive signs, particularly in the appointment of key ministers in the new GNU. Noteworthy appointments include Enoch Godongwana (Finance)(re-appointment), John Steenhuisen (Agriculture), Solly Malatsi (Communications and Digital Technologies), Leon Schreiber (Home Affairs), Dean Macpherson (Public Works and Infrastructure), Gayton McKenzie (Sport and Culture), and Pieter Mulder (Correctional Services). These appointments have bolstered confidence in the new government, but the critical question remains: “Will this be enough to steer South Africa’s economic ship in the right direction, or is more required?”

Market Sentiment and Indicators

The market’s sentiment towards the new GNU will be reflected in various “soft” indicators, such as business and consumer confidence levels. These indicators provide insight into the domestic economy’s mood and help forecast future business activity in South Africa.

For the second quarter of 2024, business and consumer confidence showed a slow but noticeable uptick compared to the previous quarter. Manufacturing confidence, as measured by the ABSA PMI, also rose steadily from 43.8 in May to 52.4 in July. This increase in confidence creates a sense of optimism within the economy, which could lead to increased economic activity across multiple sectors in the short to medium term.

Current Economic Performance

Given the recent improvements in confidence indicators, it is essential to examine current economic performance. Supply and demand indicators provide insight into whether South Africa’s economy is beginning to recover.

Supply Side Analysis

On the supply side, manufacturing and mining production, sales, and exports are key indicators. Manufacturing production showed growth in early 2024 but faced setbacks in March due to ongoing load shedding, which has hampered recovery. Manufacturing sales, however, increased steadily, except for a 3.9% year-on-year contraction in March, also due to electricity supply issues.

Mining production has experienced fluctuations, with notable declines of 4.2% in March and 3.5% in June. These challenges, coupled with ongoing issues in rail and port infrastructure, particularly in Richards Bay, are concerning. The newly appointed Minister of Public Works will urgently need to address these bottlenecks.

South Africa’s export performance has been steady in 2024, with smaller categories driving growth. Continued growth in exports is encouraging, as it supports the economy by earning foreign exchange and stimulating local economic activity.

Demand Side Analysis

Demand within South Africa remains subdued, as consumers and businesses struggle with rising living and production costs. These costs are exacerbated by increases in administered prices like electricity, water, and municipal services. Inflationary pressures in major trading partners have also impacted the South African market through higher import prices.

Since the beginning of 2024, import demand has remained low due to these inflationary pressures. Lower demand is reflected in the performance of both retail and wholesale sales. However, there was a positive development in June 2024, with retail sales increasing by 4.1% year-on-year, up from 1.1% in May and surpassing market expectations. This growth in retail sales suggests ongoing consumer demand, which is likely to positively contribute to South Africa’s economic growth in the second quarter of 2024.

Challenges Ahead

Despite some positive developments since the May elections, South Africa still faces significant challenges that need to be addressed to foster economic growth and create opportunities in the near future. These challenges include South Africa’s position on the global corruption index, general crime, infrastructure-related risks, and international developments beyond the country’s control.

Infrastructure-related challenges are particularly pressing, with electricity supply issues being the most well-known. While there have been improvements since March 2024, with maintenance units coming back online and new power units at Medupi and Kusile stations becoming operational, stable and reliable energy supply remains crucial for economic growth.

Another area of concern is South Africa’s ability to facilitate international trade, particularly given the import/export bottlenecks experienced in late 2023. These issues not only impact trade but also the mining sector, which struggles to transport coal and other materials to port facilities. Additionally, the state of the country’s water infrastructure poses a looming threat, with the potential for “watershedding” in the near future.

Opportunities for Growth

Despite the challenges, there are opportunities for growth in South Africa. The country’s rail infrastructure and port facilities require significant investment—around R12 billion and more than five years to fix. The government has acknowledged the need for private sector assistance in this regard. Investment in these areas, along with reforms announced by President Ramaphosa to the freight logistics system, could ignite South Africa’s economic recovery.

The Nedbank Capital Expenditure Project listing for 2024 indicates that R790 billion in capital expenditure programs have been announced so far, a significant increase from R193.2 billion in 2023. These projects include investments in housing, water treatment facilities, and renewable energy.

The Cape Town Central City Improvement District (CCID) also announced a R7.3 billion investment in the CBD, with property investments doubling during 2023 compared to 2022. These investments highlight the potential for growth even in challenging economic conditions.

Conclusion

Growing the economy and unlocking South Africa’s potential will require a concerted effort from both the government and the private sector. The government must implement business-friendly policies and create a favourable environment for small and medium-sized enterprises (SMMEs) to thrive.

Access to finance and markets remains a critical concern for small, medium, and micro-sized enterprises (SMMEs). This is where the private sector can play a vital role. Traditionally, banks and financial institutions have reserved funding and financing for larger companies, often excluding most SMMEs. This lack of access makes it challenging for smaller, emerging businesses to grow or enter broader markets.

Fortunately, this “funding gap” is being addressed by investment companies specializing in private equity and other alternative investments. These opportunities, once exclusive to larger financial institutions and well-capitalized venture capitalists, are now available to everyday investors interested in private equity. Private equity funds have emerged to meet the needs of both regular investors and businesses seeking funding for expansion.

Investment companies in the private equity space are attracted to the higher growth potential that SMMEs typically offer. In exchange for an equity stake, they provide much-needed funding and liquidity. As the number of listed companies on the Johannesburg Stock Exchange (JSE) has declined over the past 15 years, private equity investment has gained traction, creating new opportunities in the market. The concept of the “missing middle” in business is being addressed as more companies enter this space, unlocking business potential, providing funding, and facilitating expansion and market access.

To grow the economy and unlock the value within South Africa, both the government and private sector must contribute to creating a conducive environment for investments. By fostering a business-friendly atmosphere, they can stimulate economic growth, create employment opportunities, and drive South Africa forward.