‘GNU-phoria’ may yet deliver economic prosperity, but in small doses

‘GNU-phoria’ may yet deliver economic prosperity, but in small doses. South Africa’s economic prospects undoubtedly improved since the formation of the government of national unity (GNU), supported by the stable electricity supply, an improved inflation outlook and increased investor confidence.

Jee-A van der Linde, economist at Oxford Economics Africa, says the emerging GNU is leading a charm offensive to lure foreign investment, taking wins where they can and portraying a healthy relationship between the government and business.

“While this alone will not be enough to sustain stronger economic growth, we remain cautiously optimistic about the green shoots that have emerged. “

He points out that the mood continued to pick up since the elections in May. “Economic growth forecasts north of 3% are even being touted, as President Cyril Ramaphosa and his new government forge ahead with their charm offensive to unlock fresh foreign investment.

“The language used by participants in these engagements is aspirational and supplemented with just enough concrete plans and targets to give these initiatives legitimacy.”

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Investment conferences delivered little economic growth, GNU might

Until now, Van der Linde says, the president’s annual investment conferences over the years have done little to move the needle in terms of stronger and more inclusive economic growth. But now, South Africa has the GNU and it seems to be working.

“After some initial wobbles, the GNU completed its first 100 days in late September. There is still uncertainty about the efficacy of the GNU. Many (or at least some) are wondering whether the optimism is warranted and whether things will be different this time around.”

South Africa’s more benign inflation outlook is certainly something worth cheering about, he says, but points out that in this case, credit must go to the South African Reserve Bank (Sarb), which has been successful in its quest to re-anchor inflation around the 4.5% inflation target.

The firmer rand exchange rate, thanks in part to the GNU and lower oil prices are among the main reasons for cooling inflation, but soft domestic demand has also played a part, Van der Linde says. “Third-quarter sentiment indicators also show that businesses and consumers are more upbeat about the economic outlook.”

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Brighter outlook with GNU, but a lot of catching up to do

The outlook may be brighter, he says, but there is still a lot of catching up to do, as this graph shows:

Van der Linde says the stronger performance in domestic assets is mostly a function of investors capitalising on mispriced valuations, rather than a genuine belief that South Africa’s long-term fundamentals will improve.

“Reduced short-term policy uncertainty means local bonds look attractive within the emerging market universe. Furthermore, while South Africa’s stock market has been on a tear, recent data shows that foreigners were not buyers of South African bonds during July and August, after the formation of the GNU, but sellers of local equities.

“This disparity is a useful case in point indicating that we must not become too complacent in what can easily turn out to be a momentary purple patch.”

This graph shows that aside from the temporary trend reversal in early 2018 during ‘Ramaphoria’, foreigners remained sellers of domestic assets:

Source: Haver Analytics

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Impact of Operation Vulindlela likely moderate

Fitch Ratings also recently noted that, while the implementation of structural reforms under the Operation Vulindlela initiative has continued at a steady pace, the impact on growth will likely be moderate.

“We agree and argue that progress on economic reforms is too slow for real gross domestic product (GDP) growth to exceed 2% on a sustained basis. The progress tracker on Operation Vulindlela is overwhelmingly positive with 89% of reforms reportedly completed or on track, but when assessing South Africa’s current economic state, conditions hardly reflect that of a first-class candidate.”

Van der Linde says although there have been encouraging signs since the GNU was established, bureaucratic inertia seems difficult to break and impedes reform implementation. “Easy wins under a stable GNU, such as visa reform, South Africa’s removal from the grey list and stabilising network industries, would boost confidence and could fast-track real GDP growth to nearly 2.5% in 2026.”

However, Van der Linde points out that momentum on these wins would need to be sustained over the medium term to have a lasting economic impact.

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Getting to economic growth no mean feat

“If history has taught us anything it is that sentiment is fickle and the Ramaphoria era proved that. Nevertheless, ‘GNU-phoria’ may yet deliver economic prosperity, but we believe it will come in measured doses. We expect the economy to expand by 1.0% in 2024 and forecast real GDP growth to average around 1.7% per year over the next five years.

“This would be no mean feat, considering that economic growth averaged 1.1% per year during the past decade. From a governance perspective, South Africa is arguably in a better place than it was when Ramaphosa became president in late 2017, with the Zondo Commission reports exposing the breadth of state capture during the Zuma era.”

However, Van der Linde points out, that prosecution of implicated individuals has been slow and rent-seeking in the form of abusive tender profiteering has become embedded in the domestic economy, which is one of the country’s biggest growth constraints.

“Moreover, South Africa’s macroeconomic fundamentals have weakened during Ramaphosa’s tenure amid a prolonged investment dearth, making it more challenging to achieve sustained real GDP growth of 2.0% per year over the medium term.

“Despite the optimism about South Africa’s economic prospects, the persistent structural impediments to economic growth cannot be overlooked. Overall, there has not been enough tangible improvement from an economic perspective to be overly optimistic about South Africa’s longer-term prospects.”

This graph shows that government investment is constrained by limited fiscal space, while private sector investment has yet to take off: