South Africa has faced a challenging economic environment since around 2010 (the FIFA World Cup), and it is perhaps worthwhile exploring what can be done to put us on a sustainable and improved economic trajectory and achieve the Government of National Unity’s (GNU’s) goal of inclusive economic growth. And by inclusive, we mean economic growth that can consequentially improve the lives of all South Africans.
It is our proposition that had South Africa followed a more pragmatic approach over the last 15 years, focusing on the structural enablers of the economy, the outcomes could have been more beneficial for the economy and for society. And it could have happened without diverging from the commitment to the constitutional principles of addressing past inequalities.
In support of this proposition, we refer to the excellent book “Why Growth Matters” by Jagdish Bhagwati and Arvind Panagariya, in which the authors establish the link between economic growth and lifting people out of poverty and destitution.
The authors examine India after independence in 1947. Various governments instituted wide-ranging economic policies with the primary goal of poverty alleviation, but it was only after 1991, with the liberalisation of the Indian economy, that this goal began to be achieved. The policy initiatives of post-1991 governments led to the better economic outcomes that we see today, from which South Africa can take some lessons.
Chart 1: SA GDP per capita versus world GDP per capita
Date sampled: 27 May 2025
Source: Investec Wealth & Investment, World Bank
The reason for starting this article with the example of “Why Growth Matters” is because it is economic growth that can lead the way to improving of the lives of South Africans. South Africa has grown over the last 15 years, averaging around 1% a year, but the population has grown at a higher rate of around 1.3%.
Furthermore, as chart 1 shows, there has been a structural break in South Africa’s economic performance relative to the rest of the world, with a stark dislocation in GDP per capita compared with the rest of the world. In essence, people are worse off than they were in 2010, suggesting that economic policy has been ineffectual in addressing poverty, unemployment and inequality.
On a per capita basis, the rest of the world is 50% richer than the average South African. Growth of 1% will not lead to the envisaged goals of lifting people out of poverty and meaningfully addressing the problems of unemployment and inequality.
Chart 2: Growth outcomes vs potential
Date sampled: 23 May 2025
Source: Investec Wealth & Investment, SARB
To further illustrate the point on the opportunity cost of foregone growth in policy formation and execution, chart 2 compares nominal GDP over the period with what nominal GDP would have been had the South African economy been growing at 4.5% a year, in line with emerging market peers.
Had the economy grown at 4.5%, our nominal GDP would have been just below R12 trillion in 2024, compared with the actual number of R7.5 trillion, around 36.7% smaller. These are significant numbers, especially when one considers the benefits that could have been derived from a vastly larger GDP.
Chart 3: Revenue outcomes
Date sampled: 23 May 2025
Source: Investec Wealth & Investment, SARB, NT
Our growth rates have similarly had an impact on government revenues (chart 3). Government revenue in 2024 alone could have been around R800bn higher than it was.
Just a few weeks ago South Africa faced a Budget impasse due to a shortfall in funding, and the need to raise R75bn in the medium term to cover the shortfall. That shortfall is insignificant if one considers how much more could have been raised had the economy grown more in line with emerging market peers.
Chart 4: Cumulative lost revenue since 2011
Date sampled: 23 May 2025
Source: Investec Wealth & Investment, SARB
The cumulative figure of revenue foregone is scary, at around R5 trillion over the last 15 years (chart 4). That is material, considering the fiscal constraints facing South Africa and demonstrates the need to ensure economic growth to boost the fiscal war chest and further enable the capacity of the state to deliver services.
A few stats put this into perspective:
- The R5 trillion lost would be enough to clear almost 90% of SA’s gross national debt. (i.e. bring the debt-to-GDP ratio down to just below 10%, vs currently expected to peak at 77% this year).
- Eskom needs R390bn over the next decade for transmission lines. This is a fundamental pillar of creating greater capacity in the energy sector and ensuring that there is broader-based access to electricity. Electricity is the backbone of any structural improvement, especially considering the goals of the government to build domestic manufacturing capacity and create meaningful employment opportunities. The R390bn would be a drop in the ocean had growth been 4.5% over the last 15 years.
- Transnet needs R160bn to upgrade rail and port infrastructure. Our logistics networks are key in connecting the economy across its internal nodes, but also key in building additional capacity to meet the demands of external markets. Again, R160bn would have been a drop in the ocean had growth been in line with peers.
- Eskom has R400bn in debt – the government could have bailed out Eskom 12 times.
- Transnet has R140bn debt – the government could have bailed out Transnet many times too.
- Social grants are costing the fiscus around R266bn this year. These would have been more than affordable had growth been 4.5%, and potentially materially higher than what marginalised citizens receive now, also considering that many more people would have been absorbed into the labour market.
The significance of these stats is to show how South Africa could have been better positioned to address the prevailing needs of the state. Granted, if the economy was growing at 4.5% the assumption is that Transnet and Eskom, and some of the other structural enablers of the economy would have been functioning properly.
The numbers indicate the potential for vastly greater capacity to invest in the productive elements of the South African economy, such as in infrastructure, education, healthcare, salaries of teachers, nurses, doctors, etc.
Chart 5: SA business confidence and SOE performance
Date sampled: 16 May 2025
Source: Investec Wealth & Investment, Bloomberg, Eskom, Transnet, StatsSA
As seen in chart 5 above, business confidence has been unusually correlated with the performance of state-owned enterprises (SOEs) in the post-pandemic environment, so SOE reform momentum must be sustained or increased. Business confidence is the key leading indicator of economic growth and employment creation.
One could also argue that the unemployment rate would be closer to around 20% versus the current 32.9% (StatsSA, 25 Q1) had the SA economy been growing at 4.5%. In other words, a third of those presently unemployed (according to the narrow definition of unemployment) would have jobs.
None of this should detract from some of the victories seen of late:
- The formation of the GNU and subsequent political stability and increased policy certainty (the recent Budget impasse showed that these are nonetheless fragile).
- The increased momentum of Operation Vulindlela in addressing the various structural impediments in the economy. The next steps are critical for addressing water infrastructure and local government inefficiencies.
- Improvements in the electricity supply and logistics network.
Chart 6: SA SOE performance index
Date sampled: 16 May 2025
Source: Investec Wealth & Investment, Stats SA, Eskom, Transnet
There has been some stagnation in the recovery of our SOEs, which may be cause for concern, however, the worst of SOE performance appears to be behind us.
Chart 6 above shows that it was in 2023 when SOE performance had reached the trough of performance. A reacceleration in trend improvement is important for business confidence to grow.
Chart 7: S&P PMI and GDP
Date sampled: 6 May 2025
Source: Investec Wealth & Investment, Bloomberg
We recently saw a modest recovery in the S&P Global Purchasing Managers Index (PMI), to a neutral level of 50. There needs to be a trend improvement in PMIs, which are typically linked to economic outcomes.
Should PMIs continue to improve, the economy should continue on its path of recovery. This will likely be driven by the continued success of Operation Vulindlela.
Chart 8: SA GDP projections
Date sampled: 6 May 2025
Source: Investec Wealth & Investment, Bloomberg
Data released so far suggest that while growth was likely weak in the first quarter, if the upward trend in PMIs persists, then that can result in a marked acceleration in growth outcomes. PMI improvement will largely be a function of continued improvement in SOE performance.
At present, the SA economy, by our estimates, is tracking at 1.3% for the year, which is well above the 0.6% seen in 2024 and 0.8% in 2023. This can then lead to more meaningful employment creation, and a trend reversal in GDP per capita from the pattern of decline since 2011.
In summary, we suggest the following steps to keep the momentum going and put South Africa on a firmer growth trajectory:
- There must be a focus on economic growth, premised on “growing the pie”. There is no scarcity problem in South Africa and we must rather adopt an abundance mindset, which says resources are of sufficient quantum to drive transformation through economic growth. These should be in conjunction with policies that support the constitutional obligation of redress and equality, but premised on growth enhancement.
- Liberalisation of the economy should be a key focus area such that the structural elements of the economy can be capacitated. Deregulation an essential pillar of the process.
- Operation Vulindlela must remain at the centre of driving economic reform to achieve the objective of inclusive economic growth.
- Policies must prioritise an investor-friendly environment in South Africa as a mechanism for increased foreign investment and improved employment outcomes.
- Public-private partnerships are another area that can catalyse the economy. The private sector has sufficient capital to deploy, and a conducive operating environment that is supportive of strong returns can drive meaningful economic growth.
- Education must be at the centre of societal development to ensure the next cohort of entrepreneurs are upskilled and enabled for longer term economic success.
- A re-industrialisation policy must be sequenced to take advantage of the advantages embedded in the economy, in a business-friendly environment. Building domestic capacity is at the core of the job creation agenda.
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