South Africa’s economy posted negligible growth in the final quarter of last year. The only bit of good news is that 0.1% real quarterly growth means that a technical recession – two consecutive negative quarters – was avoided.
This is not a hugely important distinction, but it might have dealt yet another blow to sentiment.
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Read: SA averts recession as mining sector rebounds
The bad news is that growth for 2023 as a whole was only 0.6%. The underlying growth in the domestic economy has, therefore, been weak, no matter how you look at it. Why?
South African real economic growth

Source: Stats SA
Shed happens
By now, everyone knows that load shedding is a major obstacle to economic growth, and 2023 was a record year for power cuts. The recent budget noted that more than 16 000 gigawatt hours of power were shed in last year, twice as much as in 2022, which in turn was four times as much as in 2021.
Read: Load shedding in 2023 worse than the last eight years combined
A modern economy needs a reliable electricity supply, period.
However, modern economies are also flexible and adaptable, and we’ve seen a degree of resilience in the case of South Africa. After all, growth was positive, even if only barely so, and economic activity did not reverse.
Load shedding by stages

Source: National Treasury
Logistics bottlenecks also intensified during the past year, with both railway and port volumes under severe pressure. Again, a modern economy needs an efficient means of transporting goods, and South Africa is severely lacking. Businesses can move goods by road, but this is much more expensive. Sending goods overseas by plane rather than ship is even more expensive and completely unfeasible for low-value bulk items like coal and iron ore.
For example, Kumba Iron Ore recently announced that it would lower production over the medium term, resulting in 490 job losses. The reason is simply that it cannot get enough iron ore from its mines to the ports on Transnet’s struggling trains and needs to cut output to match the limited rail capacity.
Read/listen: Transnet problems force Kumba to lay off workers
The common factor in both the electricity and logistics crises is, of course, two underperforming state-owned monopolies. Years of bad policymaking led us to this point.
Cost-of-living squeeze
Another major headwind last year was the cost-of-living squeeze on consumers. The repo rate hit the highest level in 15 years, while consumer inflation averaged 6%. This ate into the disposable incomes of households, weighing on consumer spending.
Indeed, South Africa faces the unusual but uncomfortable combination of weak growth and high interest rates.
A weak economy will normally exert downward pressure on policy and market-based interest rates (bond yields). For instance, China’s 10-year bond yield hit a record low of 2.3% last week. While the Chinese government has announced a 5% growth target for this year, the bond market is not buying it; instead, it signals years of sluggish growth and low inflation ahead.
But in South Africa, sub-par economic growth means government tax revenues disappoint, leading to higher levels of borrowing.
As the market worries about the South African government’s creditworthiness, it charges a higher interest rate. This higher interest rate, in turn, lifts borrowing costs for the private sector, further depressing growth. This is a vicious cycle that must be broken, and the recent budget has taken steps to achieve it.
Commodities
Finally, commodity price moves haven’t helped. In particular, the dollar palladium price has fallen 30% over the past year, while coal is down 20%. Platinum and iron ore are roughly 10% lower. It helps that the gold price is near record levels at $2 178 per ounce, but South Africa is no longer the powerhouse producer it once was.
Read: Gold is treating investors well
Meanwhile, the price of oil, the country’s main export, has traded between $72 and $96 per barrel over the past 12 months. The current $82 per barrel level is uncomfortably high for South African motorists, who’ve just seen retail fuel prices jump.
Can these headwinds turn into tailwinds?
Tails, you win
Inflation has already started declining and will likely be lower on average in 2024. This means consumers’ income can grow in real terms this year. The economy’s wage bill grew by 6.7% year on year in the fourth quarter. If this pace is maintained and inflation declines, real income growth can support a higher rate of real spending growth.
Lower inflation also implies lower interest rates. However, the South African Reserve Bank is likely to remain cautious.
Expectations for rate cuts internationally, particularly in the US, have been scaled back recently and will influence the Monetary Policy Committee’s thinking. The committee will also be mindful of the rand’s ongoing weakness and nervously eye the recent jump in maize prices. This suggests modest rate cuts, which will help consumers.
Read:
Kganyago rules out rate cuts in short run
What’s in store for interest rates in 2024?
As noted above, the government’s borrowing cost will likely remain elevated until there is greater progress on stabilising and reducing debt.
In terms of electricity, 6 000MW of private electricity capacity has already been registered with Nersa and will come on stream in the next few quarters. This number is set to rise over time. Given that each stage of load shedding is equivalent to 1 000MW, this could significantly reduce strain on the grid, though solar and wind power output is subject to variability.
Read:
Nersa registers 908MW of new renewable generation capacity
DMRE launches bidding process for almost 8 000MW from IPPs
Whether Eskom’s ageing fleet of coal-fired power stations can ever return to operating at full capacity is an open question, but even small improvements can slice off a stage or two of load shedding. However, not everyone will be able to turn to private power. Small businesses and low-income households will continue to rely on Eskom and probably still be subject to electricity interruptions.
Cumulative capacity registered and rooftop PV installed during 2023

Source: National Treasury, Nersa
The logistics chaos should also ease over time. The cabinet adopted the Freight Logistics Roadmap in December 2023, outlining steps to improve Transnet’s operational performance and, more importantly, to allow for third-party access to Transnet’s railways.
This means private companies will be able to run trains on Transnet’s infrastructure, increasing rail freight capacity and efficiency.
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Chemicals group Sasol recently announced a deal with Transnet Rail Freight whereby Sasol will pay for the maintenance of a fleet of specialised ammonia tankers. Future partnerships of this nature can also further improve the overall logistics.
Read/listen: Transnet’s efficiency is improving and may surprise this year
Reforms in issuing mining licences, water licences, and work permits for skilled workers will also help speed up business investment.
Commodity prices are not something local policymakers or business leaders can control. The only positive thing we can say here is that following big declines, prices are more likely to rise in future than fall (the reverse is also true).
In a nutshell, the outlook is better. We shouldn’t expect a repeat of the 0.6% growth registered last year, though we also should not expect miracles.
Read: GDP figures: SA’s latest economic wake-up call
It will take time for private investments in energy and logistics to impact economic growth, and while some forms of red tape are being cut, others remain. Poor public service delivery in general, but particularly at the local government level, still adds significantly to the cost of doing business. Absent deeper structural reforms, South Africa’s long-term potential growth rate will not be more than 2% to 3%.
Prescriptive
Then there is the question of whether enough funding is available to support economic growth and development. Specifically, the notion of ‘prescribed assets’ – that pension funds should be forced to invest in certain assets – is back on the agenda.
The ANC’s election manifesto mentions that it will “engage and direct financial institutions to invest a portion of their funds in industrialisation, infrastructure development and the economy, through prescribed assets”.
This is a fairly vague statement.
It does not say how big “a portion”, and financial institutions, including retirement funds, clearly already invest in “the economy”.
It is certainly not a precise enough statement on which any pension fund member, financial advisor, or trustee can base an investment decision.
Read: ANC to pursue prescribed assets plan after vote
The 2022 change to Regulation 28 of the Pension Funds Act means pension funds can already invest up to 45% of their assets in infrastructure. At the time, it was hoped that the change would put the prescribed assets debate to bed, but apparently not.
The same amendment also allowed pension funds to invest up to 45% of their assets offshore. In practice, the trend over time has been for retirement funds to have more investment freedom, not less. Though the finance minister recently said this move was a “mistake”, there is no evidence that it has been detrimental to the local economy. In fact, having a large international asset base is a very useful buffer against exchange rate volatility. It benefits not just individual members but also the economy, broadly speaking.
Let’s put it very simply: South Africa’s economic woes do not stem from a lack of funding.
For instance, a few new companies have been listed on the JSE to raise capital in recent years. When it comes to infrastructure, the issue is not the appetite for pension funds to invest but rather the lack of bankable projects. In fact, internationally, infrastructure is a very attractive asset class for pension funds because it tends to deliver stable long-term returns.
Many local pension funds would happily increase exposure. But the pipeline of projects remains thin.
This is partly because of the complex nature of many of these projects, which often require approval at multiple layers of government and across many agencies and departments.
Moreover, until recently, the state monopolised many aspects of key infrastructure delivery, notably electricity, rail and port. This is starting to change, as discussed above, while the budget speech presented further proposed changes to public-private partnership (PPP) regulations as well as new infrastructure funding mechanisms to crowd in private capital.
Read: Far-reaching reforms to fast-track infrastructure
It is also important to note that private infrastructure funding is only feasible where there is a profit to make. Pension funds, banks, private lenders and so on want a return of capital and a return on capital. There is a long list of potential investments that meet these criteria, including rail, ports, electricity, pipelines, bulk water supply, toll roads, airports and so on.
Many other forms of infrastructure do not have associated cash flows, and are therefore not ripe for private investments. We’re not going to see suburban toll roads, for instance, or pay-as-you-go streetlights.
It is a long road from something appearing in an election manifesto to it becoming law, and along the way, there will be opportunities for the financial sector and others to provide input.
Therefore, though prescribed assets are a bad idea, people should avoid making hasty choices with their retirement savings based on speculation that may or may not be implemented.
Not alone
It should also be noted that South Africa is not the only country grappling with the question of funding growth.
In last week’s UK budget, the chancellor announced an individual savings account (ISA) where savers can invest ₤5 000 tax-free but only into British shares and bonds.
Like South Africa, UK equities have long underperformed the US, but also, like South Africa, the problem is not fundamentally a shortage of funds. Share prices are, first and foremost, a reflection of investors’ perception of value, not the amount of money coming and going.
US, US and SA equities in dollars

Source: LSEG Datastream
South Africa and the UK belong to a class of markets that includes most of Latin America and other parts of Europe, but they are ignored by global investors because there is no exciting growth story.
At the other end of the spectrum, the US and India remain markets where investors are paying up for growth, possibly a bit too much, with forward price-to-earnings ratios in the low 20s.
There is still value across the board in SA equities. Unlocking this value will require progress in implementing the reforms discussed above, as well as commodity price improvements and global rerating of these unloved markets. All this will probably take time.
Izak Odendaal is an investment strategist at Old Mutual Wealth.