The tide is turning in South Africa

South Africa has long grappled with deep-seated economic challenges, from high unemployment to persistent inequality and sluggish growth.

Stagnation, a growing debt burden, and waning investor confidence have exacerbated these issues over the past decade.

However, as 2025 unfolds, there is a renewed sense of optimism that the country is on the brink of a turnaround.

This is according to Old Mutual Wealth Investment Strategist Izak Odendaal, who noted that with the right conditions aligning, both structurally and cyclically, South Africa’s economy is poised for a positive shift.

Odendaal highlighted that one of the primary drivers of this optimism is the prospect of economic growth regaining momentum.

Structural reforms and increased investment are beginning to bear fruit, setting the stage for a more dynamic and resilient economy.

Economic growth is fundamentally tied to capital investment, productivity, and labour force expansion.

While South Africa has an abundant labour supply, capital investment has remained insufficient, with national investment levels falling far short of the 30% of GDP benchmark generally needed for sustained high growth.

The consequences of this shortfall are evident in the country’s struggling infrastructure, sluggish productivity, and constrained economic output.

However, Odendaal noted that efforts to reverse this trend are already underway, particularly in key sectors such as energy, logistics, and water infrastructure.

The unbundling of Eskom and the opening of South Africa’s electricity market to private-sector participation have been significant milestones.

Although challenges remain—evidenced by occasional power outages—the likelihood of returning to the crippling levels of load shedding seen in 2022 and 2023 is minimal.

The energy sector continues to attract substantial private investment, ensuring that improvements will be sustained well beyond 2025.

Odendaal also pointed out that logistics, another critical area of reform, is also seeing meaningful progress.

Transnet’s deterioration over the past decade has hindered economic efficiency. Encouragingly, reforms are in motion, with Transnet Rail now separated into distinct infrastructure management and operational divisions.

The opening of rail networks to private sector operators mirrors the electricity sector’s restructuring and is expected to unlock new investment and efficiency gains.

Infrastructure investment, particularly in energy and transport, has the potential to attract significant domestic and foreign capital.

The momentum observed in the energy sector is likely to spill over into logistics and bulk water provision, facilitating broad-based economic recovery.

Even if the political landscape shifts, it is unlikely that South Africa will return to outdated state-controlled monopolies, as the push for market-driven solutions has gained too much traction.

The political landscape itself has been another source of optimism.

The formation of the Government of National Unity (GNU) in 2024 signalled a new era of cooperation, albeit not without its challenges.

Odendaal said while coalition politics brings inevitable disagreements, particularly on contentious policies such as the National Health Insurance, the coalition partners recognise the necessity of working together.

The alternative—political instability or populist economic policies—is largely unappealing to all parties involved.

As a result, the GNU is expected to remain intact, at least through the municipal elections in 2026 and potentially until the ANC’s internal elections in 2027.

South Africa’s role as the G20 host this year further underscores the importance of maintaining political stability to avoid global embarrassment and reassure investors.

Beyond structural reforms, cyclical factors also contribute to an improved economic outlook.

High interest rates have been a significant drag on economic activity in recent years, but relief is finally on the horizon.

The South African Reserve Bank has already cut the repo rate by 75 basis points, providing much-needed relief to consumers and businesses.

Lower inflation, which reached just 3% in December, has played a key role in enabling these rate cuts.

While the dip in inflation was partly driven by temporary factors such as falling fuel prices, the broader trend suggests a more stable pricing environment.

The Reserve Bank expects inflation to average 3.9% in 2025 and 4.6% in 2026, with additional rate cuts likely if inflation remains contained.

However, while cyclical factors provide short-term relief, Odendaal warned that structural challenges remain.

One key issue is the persistently high-risk premium attached to South African debt.

The government’s perceived lack of fiscal discipline has led to elevated borrowing costs, which, in turn, affect private sector financing.

For interest rates to decline further in the long term, South Africa must improve its fiscal position through a combination of economic growth and prudent spending.

The upcoming Budget Speech is expected to reinforce the Treasury’s commitment to fiscal consolidation, maintaining a rising primary surplus—where tax revenues exceed non-interest spending.

If successful, this strategy could pave the way for eventual credit rating upgrades and lower borrowing costs across the economy.

If the government remains committed to its reform agenda, GDP growth could rise to 3% by 2027, accompanied by lower inflation and interest rates.

While the Reserve Bank has noted upside risks to inflation stemming from external factors, it remains committed to a cautious and measured approach to monetary policy.

South Africa is entering 2025 with a significantly improved economic outlook compared to previous years.

Structural reforms in energy and logistics, combined with a more stable political environment under the GNU, are setting the stage for sustained growth.

Meanwhile, lower inflation and interest rates are providing much-needed cyclical relief, boosting consumer and business confidence.

While challenges remain, the trajectory is increasingly positive.

Investors, both local and international, are beginning to take notice, and if the current momentum is maintained, South Africa could finally be on the path to unlocking its full economic potential.