South Africa doesn’t need a miracle

 ·4 Jun 2024

Economists at the Bureau for Economic Research (BER) say that South Africa doesn’t need miracles or fairy tale magic to boost the economy and change its growth trajectory—it simply needs sustained implementation of existing structural reform plans.

In a research note this week, the BER posited that, using president Cyril Ramaphosa’s Operation Vulindlela (OV) as a starting point, it is possible to push the country’s GDP growth rate up to 3.5% a year fairly easily, taking it out of the slow, low-growth scenario that sees a paltry expansion of only 1.3% in 2024.

“Importantly, no new initiatives are required as many of the building blocks are in place,” it said.

“Many reforms aim to improve the South African business environment. If implemented successfully, the anticipated improvement in business confidence and private sector investment will also play an important role in tilting South Africa’s trajectory upward.”

Using the BER’s quarterly forecast for May as a baseline, the economists tweaked some domestic assumptions—like energy availability (EAF) and logistics—to see their impact in the model

Notably, the BER said that all outcomes are based on domestic assumptions only, without any changes to the global backdrop.

“In reality, the global economy can help lift growth or work against us. This is important for growth forecasts but also impacts the currency,” it said.

The BER said that Operation Vulindlela has already done a lot of the heavy lifting in terms of policy reform.

It aims to accelerate economic growth through structural reforms, focusing on key areas such as energy, digital infrastructure, transport, and water to stimulate investment, improve service delivery, and enhance the competitiveness of the South African economy.

It also seeks to streamline regulatory processes, remove bureaucratic obstacles, and promote public private partnerships to drive economic development and create opportunities for all South Africans.

“There is no need to reinvent the wheel. Our scenario uses OV because it is an existing plan that has already booked successes and is well supported within the public and private sectors,” the BER said.

For the upside scenario to become a reality, however, the economists listed some fundamentals:

  • The South African constitution and Rule of Law are maintained, post elections
  • The South African Reserve Bank remains independent and can pursue its mandate without fear of interference.
  • Fiscal discipline remains intact, with a commitment to bring down government debt to GDP levels over time.
  • Prudent funding decisions around implementing the National Health Insurance (NHI) or a Basic Income Grant (BIG).
  • Policy uncertainty diminishes as reform momentum gathers pace.

“Budging on any of these assumptions would have a significant negative impact on the economy,” the BER said.

To boost growth to the upside 3.5%, other factors needs to turn in South Africa’s favour. These include:

  • Significantly better electricity outcomes and continued improvement in Eskom’s EAF with private sector participation in expansion.
  • Water security concerns are addressed by expanding water infrastructure at the municipal level, overseen by an independent authority.
  • Reformed logistics network driven by public and private sector collaboration, particularly in rail and ports.
  • Sentiment—both from businesspeople operating within the country and from investors (local and domestic)—shifts towards investing in the country.

“Implementing these reforms can boost real GDP growth by 1.5 percentage points by 2029: 3.5% vs. the 2% modelled in our baseline,” the BER said.

“The largest driver of this improvement in the growth trajectory stems from fixed investment, which is 4% pts higher by 2029, underpinned by robust private fixed investment.

“Given the improved energy availability and access to ports and railways, exports perform much better, reaching growth of almost 5% in 2029 vs. 3% modelled in the baseline.”

The BER said that the specifics of the modelling can be complex, and the international factors—particularly the impact on the rand and risk premium—but stressed that the underlying fact remains:

“A committed pursuit of reforms and a general dedication from all stakeholders to bringing down the cost of doing business in South Africa would improve our competitiveness. This will enhance South Africa’s potential for success.”

The group said that it is also easy to paint a more negative picture, given the baseline from which the model works. However, “we can also easily be more positive about the economy than presented

“The scenario presented (here) is just one of the ways the coming years could play out—and the next few weeks are critical.”

Read: South Africa’s ‘watershed moment’ – and a very important 2 weeks

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