Macro Perspective 47 | Navigating South Africa's economic challenges

In today’s podcast, Peter Brooke delves into the intricacies of the South African economy, exploring the impending elections and the possible coalition governments. He also looks at the report by economist Ricardo Hausmann, shedding light on the 15-year growth slowdown and the urgent need for state capability. Despite economic woes, Peter identifies positive shifts and discusses opportunities in green energy and spatial development. 

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Transcript

Good day. I'm Peter Brooke, a portfolio manager at the old mutual investment group. This is Macro Perspective 47 of 2023 and I want to talk about the South African economy. 

As you may know, every twice a year we look at our themes and at the moment, with the elections coming up next year, we're doing quite a lot of work on politics. So, I went to a talk by John Steenhuizen, the leader of the Democratic Alliance, which is the official opposition. He made two interesting points. 

The one was around coalition governments and that South Africa will need a lot of time after the election to work out how coalitions will potentially come together. In a country like Germany, which has got a lot of experience of coalitions, this typically takes at least a month. While apparently South Africa has only two weeks available to form a government. So, we can expect some uncertainty. 

The second point was he was raving about the latest research released by Ricardo Hausmann from Harvard University. Ricardo has had a long relationship with South Africa and provides a valuable outsider perspective. I've read his work over the years and found him to be very sensible and if anything, I found him to actually have a slightly positive bias towards South Africa. However, his latest report is damning. To quote “the fundamental reason that growth has slowed over the last 15 years is a collapse of state capability to provide the public goods on which the economy depends”. The report lays the blame for this on political gridlock in terms of decision making, ideology, preferential procurement, lack of municipal capability and an increase in political patronage. I think this explains very clearly why the DA is so excited by the report. 

Now, while this is bad news and clearly South Africa has been on a tough path, just to put a bit of context around that, the unemployment rate has increased by half a percent per annum since independence in 1994. There is some good news, and that’s things are so bad that we are starting to see change. The crisis at Eskom, Transnet and the Ports is seeing a shift in ideology and the private sector is being allowed to help solve the problem. In fact, our group economist Johann Els thinks this is enough to push trend growth up to two and a half percent. Just to be clear, that's not wholesale reform, that's allowing the private sector in to fix the problems. But without that change, the South African economy will fail. 

Where the report was more positive was on two areas where it can see big scope for improvement. The first is massive investment into green energy, where South Africa has a competitive advantage. The second was a more interesting one talking about spatial development, working on the fact that under apartheid labour was too far from jobs and that has continued. So, if you look at similar economies to South Africa, the level of self-employment or micro enterprises is 20% the labour force, while on South Africa it is only 4%. So essentially, we need to become more informal, more like Nigeria and less like Europe. So, an interesting question from all of this is will we see political change as a result of the deteriorating service delivery? We will know next year. I hope you found this perspective useful. Until next week.