South Africa Heads for Revival

Africa’s largest economy, South Africa, has seen little growth over the last decade, expanding by less than 1% annually. Yet recent figures suggest a change may be imminent. 

Since the formation of the ‘Government of National Unity’ coalition government in 2024, President Cyril Ramaphosa has been taking action to spur economic growth. Central to his plan is Operation Vulindlela – isiZulu for ‘clear the path’ – which has aimed to tackle issues including power, transport, water and local government.

A major contributing factor to South Africa’s minimal GDP growth has been its logistics crisis within the export industry. Poorly maintained and inefficient ports and railways, controlled by crime, have slowed exports and investment. Thus, improving transport networks are at the forefront of the issues the operation must address.

In recent history, South Africa has suffered consistent power blackouts as a knock-on effect from such transport disruption, as the country relies heavily on coal-fired power plants. Operation Vulindlela has taken steps to open the electricity sector up to market competition. This has already generated positive results, as Eksom (the state power company) has turned a profit after 8 years of losses and dependence on government bailouts.

S&P Global Ratings have partially credited the government's reduction in financial pressure to Eksom and their recent record of budget surpluses with securing the country’s first credit upgrade in two decades. In November, they lifted South Africa’s local currency rating by one notch to BB+, and its foreign currency sovereign rating from BB to BB-, two notches below investment grade.

S&P thus signals greater optimism due to better tax revenue, a more stable electricity supply, reduced need for bail outs, and stabilising government debt. There are hopes this will kickstart credit upgrades by other rating agencies, potentially allowing South Africa to regain its investment-grade status, lost in 2020. 

However, while falling, government debt is only expected to decrease gradually to 75% as a share of GDP by 2028, with debt interest averaging almost a fifth of revenues.

Citizens of South Africa have been able to see the recent economic boost, as skyscrapers are built in large numbers and domestic car sales have spiked.

Unemployment fell in the third quarter from 33.2% to 31.9%, with a particular boost to construction jobs. Construction output was one of the 9 critical industries within the country that experienced positive job growth – utilities being the exception – for the first time in three quarters.

Car sales had previously taken a hit after South Africa’s largest single export destination, the US, imposed a 25% levy. While the 90% fall in car exports to the US cannot be remedied entirely with the increase in domestic sales, the domestic market can provide some support.

Among other signs of South Africa’s revival is its removal from the Financial Action Task Force’s ‘Grey List’ – countries identified as requiring monitoring due to inadequate systems for combating money laundering and other financial crime.

Following this, the country’s central bank lowered its inflation target for the first time in 25 years, from 4.5% to 3%, matching other emerging economies. This has helped the Rand to strengthen 0.7% against the dollar.

Finance Minister, Enoch Godongwana, claims that the lower inflation target will support business investment and household spending. He cautions that, in the short-term, “achieving fiscal targets will be more challenging” due to lower nominal GDP, yet the “long term benefits outweigh the costs”.

Consequently, he has lowered the county’s expected GDP growth to 1.2% for this year, from 1.4%. Regardless, this estimate is an increase on the 0.5% growth recorded in 2024.

Many economists suspect that if economic reforms are continued, South Africa may be heading towards growth rates around 3.5%, a rate at which the country has not grown in 15 years.