What will it take to fix South Africa’s economy?

Economists and South Africans were shocked last week when the latest gross domestic product (GDP) figures for the third quarter showed that the economy did not grow at all.

While everybody agrees that the economy is in dire need of fixing, what will it take?

Roy Havemann, senior economist at the Impumelelo Economic Growth Lab at the Bureau for Economic Research (BER), says the country’s economic growth is “still stuck”.

“The BER’s baseline forecast is for economic growth to average just below 2% from 2026 to 2029 and while this would be faster than the decade before the pandemic, this is not enough.

“The gross domestic product figures highlight that growth remains weak. GDP contracted in the third quarter by 0.3% and even excluding the volatile agricultural sector, growth was 0.4%. While there are some positive signs in the fourth quarter (particularly business confidence), growth of even 1% remains a challenge.

“Our baseline forecast is that real GDP growth will average just below 2% between 2026 and 2029. This is in line with other forecasts for the SA economy, which note that the “speed limit”, or potential growth rate of the South African economy is weak.”

He says while the BER is positive about growth in 2025, it sees a “camel hump” with growth slowing once again through the remainder of its forecast period to just below 2% instead of maintaining an upward trajectory.

“This is due to cyclical support that is expected to fade after 2025 and unfortunately, government’s track record of slow implementation and delays means that we expect to see some loss of momentum on the reform front.”

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How can we break free from 1-2% of economic growth?

Havemann says first, we have to look at what is holding us back:

• Load shedding caused deep damage. Without a stable supply of electricity, we were unable to expand the local mining and manufacturing sectors, with knock-on effects throughout, including construction. While a cheap and secure supply of electricity was previously a comparative advantage for South African production, since load-shedding began in 2008, the opposite has been true. The lifting of load-shedding in 2024 was positive for demand and provided a boost to sentiment. However, businesses must be sure that there is a stable supply of electricity before committing to long-term investment.
• Our weak ports and rail system. Port cargo has fallen and freight rail capacity has been on a long downward trend since 2018. Over the past three years, port capacity was stagnant.
• Municipal water supply problems underscore local government weaknesses. Not only is water a critical input for many activities, but the lack of stable water supply in major metro areas has been a drag on consumer and business confidence. It also exposed serious weaknesses in local government capacity.
• Ongoing service delivery issues and broader governance problems are also constraints. Inadequate public service delivery hurts the poor the most, as wealthier households can source many of their needs from the private sector. Governance issues, such as the Financial Action Task Force (FATF) greylisting, also harmed the country’s ability to do fast and unburdened cross-border transactions for example.

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How to lift these constraints on the economy

Havemann says lifting these constraints could increase growth to 3%. Government’s delivery unit Operation Vulindlela identified specific constraints on economic growth and the Lab took these areas as levers in the BER’s macroeconometric model to see what the impact on growth could be.

“Ongoing electricity reform, ports and rail reform, water and governance reform and some other reforms could meaningfully lift economic growth to above 3%,” he says.

“Eliminating load shedding will support growth in several ways. However, this is not enough. A durable improvement in electricity performance needs the electricity reforms to continue. This includes a proper unbundling of Eskom and a viable business model and balance sheet for the National Transmission Company of South Africa to ensure that new transmission grid is constructed at scale.”

He points out that Transnet carried 151.7 million tonnes of capacity in the current financial year and the BER estimates that an additional 60 million tonnes could be added to capacity within only a few years to boost export capacity as well as investment.

“Water reforms will crowd in private sector investment. The South African National Water Resources Infrastructure Agency SOC Limited will be key in creating a bankable entity that can deliver bulk water. But bulk water is not the major constraint over time but rather the delivery at a municipal level. Here, strengthening local government capacity and capabilities are vital.”

Havemann emphasises that governance is important. “The decision by the FATF to greylist South Africa due to weaknesses in our money laundering regime highlighted that the governance concerns from the ‘state capture’ era have real-world consequences. These have also hurt business confidence.”

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What is the impact of the reforms on the economy?

He says the BER’s modelling shows that the implementation of these reforms could accelerate growth to 3.3% by 2025 already. The BER’s model shows how the four levers feed through into the economy:

• Exports could add up to 0.7% to growth. The biggest impact of a reform agenda focusing on electricity, ports and rail is unsurprisingly the potential to increase exports. In previous years, South Africa was unable to capitalise on surges in commodity prices because it was simply unable to get mining goods out of the country fast enough. “It is important to note that imports, however, deduct 0.8% from growth, in part due to the import intensiveness of investment. As the industrial base develops, this drag could reduce over time.”
• The investment could add a further 0.6%. Already, we have seen a surge in private sector investment in electricity as the renewal energy programme and lifting of licensing constraints supported the building of new solar and wind plants. “Our analysis shows a strong correlation between sentiment, which includes business confidence, consumer confidence and political risk and investment, with the assumption that sentiment should improve further as the government’s commitment to structural reform is recognised and appreciated over time.”
• Job growth and positive real wage growth support higher levels of household consumption. The model shows that household consumption can add an additional 0.6% to the country’s economic growth.
• Overall, this would add around 1%pt to economic growth, but it is important that the package of reforms happens together. Lifting the constraint to ports, for example, will not be enough to increase economic growth. A stable supply of electricity and water will also be needed. The reform agenda needs to work in lockstep, Havemann says.

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A clear programme of action is needed to fix the economy

However, Havemann says this is not the BER’s baseline forecast as it must still see a clear programme of action (and, more importantly, implementation) from Operation Vulindlela (OV) and government to tackle these constraints. OV will have to be reinvigorated to ensure that the accelerated programme can be achieved.

“Operation Vulindlela Phase 1 (OV 1.0) showed that a dedicated reform programme can deliver results. Significant progress was made, particularly in electricity and limited but still important progress was made in logistics and other areas.”

However, he points out that there are several risks looking ahead. “These include overloading the team with poorly scoped and vague reform objectives. There are several things that need reform, but few of them are well-suited to the OV approach of a clear set of specific, measurable, achievable, ambitious, realistic time-bound (“SMAART”) reform agenda.

“For example, for municipal reform, there is a strong need to clearly define what OV can and should do. To repeat something we have said several times this year, the implementation of existing structural reform plans can lift economic growth beyond 2% and in fact, we can get there in a short space of time. But the crux is in the implementation and any further delays will mean that 3% becomes more and more difficult to reach.”