South Africa is kicking the growth can down the road
South Africa is not investing enough in infrastructure, which is severely limiting growth in the country.
The Nedbank Group Economic Unit, International Monetary Fund and Deloitte have all pencilled in a measly 1% growth in GDP in 2024.
Speaking at a Pre-National Budget roundtable, Deloitte Africa Chief Economist Hannah Marais said that investment in infrastructure is the best way to stimulate growth in South Africa.
Currently, investment in infrastructure has been driven by the private sector, with the unexpected GDP growth seen in the first two quarters of 2023 linked to the purchase of alternative power sources due to Eskom’s failure to provide a consistent power supply.
However, private businesses in South Africa are still battling major headwinds. Deloitte’s Jo Mitchel-Marias said that many businesses are in the “zombie zone,” where they can pay operating costs and service their debt but lack the funds for capital expenditure.
These businesses are also at risk of going into business rescue or liquidation after suffering one major shock, which was recently seen with electronics distributor and manufacturer Ellies.
To stimulate meaningful economic growth in South Africa, Hannah Marais said that investment in infrastructure should be 30% of GDP.
However, it currently averages roughly 15% and has only ever hit a record 20% due to the 2010 FIFA World Cup.
“This (investment in infrastructure) will require the government to enhance infrastructure delivery by upping both quantity and quality. It needs to crowd in more private sector financing for larger projects, review the public-private partnership framework, and establish an agency to support finance and implementation of infrastructure,” Marais and Deloitte’s Hanns Spangenberg said.
However, these reforms are unlikely to be announced in the 2024 Budget, with the government instead kicking the growth can down the road.
A major problem with Deloitte’s prediction of an average growth of 1.4% between 2024 and 2026 is that South Africa’s population grows at roughly 2% each year, meaning that South Africa’s population is actually getting poorer.
Crunching the numbers
Nedbank economist Johannes Khosa shared similar sentiments, noting that the outlook for fixed investment is obscured by the difficult operating conditions, with the RMB/BER Confidence Index dropping to 31 in Q4 from 33 in Q3.
This is unlikely to improve this year amid the constant infrastructure constraints, such as load shedding and Transnet’s port issues, and slow economic reforms.
The fading profits from weakened demand and higher production costs will also keep private firms wary of spending capital, with gross fixed capital formation (GFCF) expected to grow by a meagre 0.5% in 2024.
“Faster growth in fixed investment can be achieved through accelerating structural reforms, restoring fiscal discipline, and tackling crime and corruption, which will lift business confidence, raise the country’s potential growth rate, and encourage investment by the private sector,” Khosa said.
Government consumption expenditure (GCE) is also predicted to decline as there is a sharp failure in government finances. This was driven by the drop in corporate tax revenue as weaker demand and higher operating costs dampened profits.
In addition, Finance Minister Enoch Godongwana announced in the Medium-term Budget Policy Statement that South Africa’s budget deficits were expected to grow from the previous estimate of 4.0% of GDP to 4.9%, which will force the government to contain spending.
Khosa thus predicts GCE at an average of 1.5% in 2024 and 2025, but this could increase due to unplanned election-related spending.
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