South Africa's rebound shows signs of longevity

Investment remains weak but progress on reforms could help rekindle foreign flows

Good news about its economy is rare these days, but South Africa’s unexpectedly large bump in growth numbers this week catapulted it out of its longest recession in more than a quarter of a century.

Quarterly gross domestic product figures showed that the economy grew by 66 per cent in the third quarter. The upside was driven mostly by a rebound in manufacturing, trade and mining. A weaker domestic currency also helped.

“We are out of a recession but getting back to pre-Covid levels might take five years or so,” said Makwe Masilela, chief investment officer at Makwe Fund Managers in Johannesburg.

Compared to the same quarter last year, GDP is expected to be in negative territory, at minus 6 per cent.

The lifting of stringent lockdowns that were in place during the second quarter played a significant part in the recovery.

“Our economy is 60 per cent driven by household spending, and now that people are out shopping again, we have seen a big improvement in economic activity,” said Mr Masilela.

Although most analysts expected a sizeable jump in GDP as the country moved beyond lockdown, none expected it to improve as much as it did.

“There was a general expectation of a significant recovery in GDP growth, but 66 per cent was better than the best forecasts,” said Azar Jammine, chief economist at Econometrix in Johannesburg.

However, the fact that growth was consumer-led also pointed to an underlying problem – a lack of investment spending.

“The economy improved on people spending more rather than investing into the longer-term future,” Mr Jammine said.

This is a long-standing problem, one that contributed to the latest recession and the general lacklustre performance of the economy.

“This is a structural feature of the economy that has contributed to the decline in performance over the past decade. We are not investing in the goods and services we need, and are just consuming a lot.”

Economists in South Africa generally agree that the past 10 years have eroded investor confidence. Rampant corruption has cost the country almost 1 trillion rand ($66.2 billion), according to figures presented to parliament by President Cyril Ramaphosa.

Alongside this, the mismanagement of state enterprises such as utility Eskom resulted in intermittent power cuts that disrupted operations at mines and factories.

Since taking office two years ago, Mr Ramaphosa has rebuilt anti-corruption investigation and prosecuting units that his predecessor Jacob Zuma had systematically dismantled. Managers of most state-owned companies have also been replaced.

“There are some very positive things happening on the ground,” said Maarten Ackerman, chief economist at Citadel Investment Services in Cape Town.

“We are definitely sorting out corruption. There is also some very good progress on some of the state-owned enterprises, especially Eskom.”

Mr Ackerman said that if Mr Ramaphosa’s administration continues to push through reforms and investors are convinced that these will be lasting features, money may once again flow into the economy.

Encouraging developments in recent months include the arrests of senior members of the ruling African National Congress on corruption charges. Among these are previously untouchable figures such as Ace Magashule, the ANC’s secretary general and the country’s most powerful politician after Mr Ramaphosa.

At the same time, Mr Ramaphosa appointed a seasoned industry technocrat, Andre de Ruyter, to lead Eskom. Since taking office earlier this year, Mr de Ruyter has ended suspicious supplier contracts and fired or forced out hundreds of managers suspected of incompetence, corruption or both.

“There are already reforms in the pipeline – it is just not enough, and quick enough yet,” said Mr Ackerman. “But if we can at least continue with these kinds of changes, that will at least start to address the negative sentiment and create an environment where economic growth can be positive.”

In the meantime, the country will also benefit from the increase in demand for its primary export – minerals. Demand for gold, iron ore and platinum is growing as economies around the world improve. Good rains that ended a decade-long drought also brought a bumper wheat crop, which also boosted exports.

Mr Jammine said these actions vindicate optimists who forecast a strong year in 2021 for the South African economy. In particular, Treasury officials forecast modest growth next year and an associated increase in tax revenue.

Many economists had scoffed at this, but now it appears this optimism was justified.

“Treasury’s forecast of a pickup in 2021 of 3.3 per cent is very much on the cards,” said Mr Jammine.

“It may suggest too much pessimism around tax collection this year, and things are not quite as bad as some pessimists were suggesting.”