Electricity and Logistics Reforms Spark Cautious Optimism for South African Economy

https://iframe.iono.fm/e/1590208?layout=modern" width="100%" height="170" frameborder="0

You can also access this podcast on iono.fm here.

JEREMY MAGGS: South Africa’s economy often faces harsh criticism, but Johann Els, Old Mutual’s group chief economist, is challenging that perception. He believes the nation demonstrates resilience and that reforms are taking effect, suggesting that critics of impending collapse may overlook key developments.

Listen/read: Major challenges to the SA economy – Old Mutual

Nonetheless, the current situation is undeniably tough. Unemployment rates are at their highest, investor confidence is shaky, the rand is weak, and households are struggling. So, is Els presenting a realistic view, or is he merely downplaying significant issues?

Johann, it’s great to have you. You assert that South Africa isn’t a disaster, but isn’t it difficult to reconcile this with the record unemployment and infrastructure challenges we’re facing?

JOHANN ELS: Indeed. There are significant negatives in South Africa. We see many failures, whether in government or state-owned enterprises (SOEs) and various policies. I don’t dispute that.

However, when considering investments, we need to focus on the future. We must acknowledge the policy changes that are being implemented. Operation Vulindlela has played a crucial role in stabilizing Eskom. We’ve made progress in involving the private sector in electricity generation.

Recently, we witnessed substantial announcements regarding private sector participation in Transnet operations. This is a gradual process, and immediate benefits are unlikely, but we must consider the growing involvement of the private sector in areas where the state and SOEs have faltered. Looking ahead, we can anticipate slightly improved economic growth.

Read: Rail reform milestone puts SA economy back on track

Although it won’t be exceptional. Jeremy, reaching the 5% or 6% growth we need in South Africa seems unlikely due to skills shortages, labor market problems, and more. Nonetheless, the current developments could help us move beyond the 1.1% average growth we’ve seen over the past 16 years toward around 2.5% to 3%. This will take time. As Barbara Creecy rightly pointed out, implementing these changes is a slow process, but we are actively working on them.

JEREMY MAGGS: You mention evidence of reforms starting to take effect. The pressing question is whether this momentum is sustainable in the medium to long term.

JOHANN ELS: Once the private sector is allowed to play these roles—consider the investments in electricity generation, wind, and solar farms—reversing this trend becomes increasingly challenging. Government initiatives like Operation Vulindlela are promoting competition in the electricity sector.

Read: South Africa has met 10% of reform targets, new tracker shows

You’re correct; we are skeptical given the 15 years of slow progress and limited policy enactment. Yet, changes are happening, and as the private sector takes a more significant role, reversing this course will be difficult.

JEREMY MAGGS: You are optimistic that these reforms, which the government has historically struggled to implement, are beginning to yield results—indicating potential for sustainability and momentum. What are the risks?

JOHANN ELS: Yes, the risks of regression are real. We’ve seen how easily momentum can be lost. However, Operation Vulindlela is making considerable strides, and quarterly updates reflect tangible progress, although I acknowledge it remains slower than necessary and the scale is insufficient.

I perceive positive momentum, even if it is delayed.

JEREMY MAGGS: Johann, how does the current relative stability of the rand serve as an indicator of the economic situation?

JOHANN ELS: That’s complex. The rand is weaker than it ideally should be based on fundamental inflation disparities, likely factoring in many of South Africa’s negatives. Nevertheless, a degree of recovery appears possible, particularly due to a weaker dollar. Moving forward, as expectations for the dollar’s weakness continue—caused by uncertainty regarding the US economy—there’s potential for the rand to bounce back significantly. During the pandemic lockdown in 2020, the rand fell to nearly 19.90 to the dollar but improved to 13.50 within 15 months. A similar recovery is feasible.

While hitting the 13 range again may not be realistic, a return to the 16 or even 15 range in the near term seems plausible. With improved growth, a lower inflation rate, and reduced fiscal risks, I expect ratings agencies to reevaluate their debt-to-GDP expectations, leading to possible upgrades in the coming years.

I believe the rand could be somewhat more stable in the medium to long term than we’ve grown accustomed to.

JEREMY MAGGS: In closing, Johann, investor confidence remains low. Doesn’t this weaken your argument?

JOHANN ELS: It certainly dips, but in times when investors are willing to embrace more risk in emerging economies—especially when sentiment towards the US dims—I think South Africa remains on their radar.

Read: The global economy’s strange crossroads

We’re not a failed state. When comparing our fundamentals to other similar emerging markets, we aren’t at the bottom of the ranking in terms of corruption. Yes, while corruption persists, we’re not the most severely affected.

Foreign investors I converse with recognize the robustness of South Africa’s system, the strong constitution, and a sophisticated financial sector, bolstered by trusted institutions like the Reserve Bank and Treasury with their inherent checks and balances, which can attract capital flows.

However, the significant issue remains the lack of growth.

Looking ahead, investors who have an adequate time horizon may realize that a more substantial role of the private sector in the economy might steer us onto a better growth trajectory—not stellar, but an improvement compared to our current situation.

JEREMY MAGGS: Johann Els, group chief economist at Old Mutual, thank you very much for your insights.

Stay updated with Moneyweb’s comprehensive finance and business news on WhatsApp here.