South Africa’s potential is still being held back
South Africa has increased its trade position over the past year, but inefficiencies at state-owned logistics company Transnet continue to hold back the country’s trade performance.
This was outlined by Investec’s Chief Economist, Annabel Bishop, who explained that South Africa has recorded a substantial trade balance of over R116 billion from January through October.
This is a significant improvement compared to last year to October’s cumulative R30.2 billion, which “comes as commodities prices have risen versus last year, with a stronger rand and a stronger term of trade.”
One of the most critical entities for trade in South Africa is state-owned Transnet; the custodian of ports, rail and pipelines.
Its objective is to ensure a globally competitive freight system that enables sustained growth and diversification of the country’s economy.
However, it has faced a significant deterioration over the years.
“Some improvements on Transnet’s port congestion and rail freight capacity played a modest role as payload volumes increased slightly, but capacity constraints at Transnet overall remain dire,” said Bishop.
She said that deep-rooted structural problems at the SOE, which will take a long time, “will inhibit trade more so than tariffs from the Trump administration.”
Recently, ratings agency S&P placed the entity on a credit watch.
A credit watch is a precursor to a rating downgrade, and S&P notes, “(t)he CreditWatch placement reflects our view that Transnet’s cash flow will not improve sufficiently or quickly enough to maintain its existing leverage, and capital structure.”
Transnet’s CreditWatch placement reflects concerns over its ability to reduce leverage and improve cash flow.
Elevated capital expenditures and debt servicing costs limit operational flexibility and governance issues, including past mismanagement, exacerbate risks.
S&P said that a downgrade could be avoided if Transnet “addresses operational challenges faster than expected, leading to enhanced cash flows.”
“In resolving the CreditWatch, we will also determine if Transnet’s balance sheet optimisation plan and/or additional government support are in our view credible and sufficient to achieve a long-term capital structure commensurate with our ‘BB-‘ issuer credit rating,” it added.
Progress made, but not enough
“While the lift in commodities prices drove the value of exports higher, South Africa has also seen some progress at Transnet, although this is limited versus the extent needed, with the SOE still stifling GDP growth by around 3.0% y/y per annum,” said Bishop.
The Investec Chief Economist added that the freight capacity at Transnet’s port and rail services continue to “run substantially below the demand for these services in the country, with the monopoly negatively impacting the growth potential of the country.”
She added that South Africa could have seen economic growth of over 4.0% y/y this year in the absence of the severe transport constraints.
S&P expects gradual improvement in Transnet’s performance due to reforms and initiatives, but high leverage and debt costs remain.
While progress is made in infrastructure and efficiency, significant capex is needed for turnaround. Operational challenges like vandalism persist, with 2024 freight volumes increasing slightly, but still below prior levels.
For 2025, Transnet is targeting to handle about 170 million mt and expects improving availability of locomotives to aid further recovery in rail volumes and efforts to improve availability of ports equipment.
This, however, remains below prior volumes around 183 million mt.
“Notwithstanding the challenges facing Transnet, we think the company continues to play an instrumental role in South Africa’s transport industry and by extension its economic growth, due to its control of all major logistics infrastructure,” said S&P.
Going forward
Overall, Bishop said that Transnet’s constraints on freight transport in the economy, economic activity, and real GDP growth are still dire, limiting GDP growth to below 1.0% y/y this year and inhibiting economic activity next year as well.
“While continued, and substantial work on turning Transnet around is expected to continue, this will take several years due to the deep-rooted structural problems at the SOE, which will inhibit trade more so than tariffs from the Trump administration,” added Bishop.
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