South Africa

Economic growth in South Africa appears to be gaining momentum after a sluggish start in 2024. Post-general election, consumer and business confidence has risen, probably driven by increased trust in the Government of National Unity (GNU) and its potential reforms. However, the mining sector, which accounts for a significant portion of exports, remains weak. GDP growth for 2025 is projected to reach +2% year-over-year, supported by new reforms and an improved electricity supply. The coalition between the African National Congress (ANC) and the Democratic Alliance (DA) has brought in a government friendly to business and introduced a new layer of checks and balances.

As the continent’s most diversified economy, South Africa has historically been hindered by weak infrastructure, as evidenced by the underperformance of the mining sector. Throughout 2023, mining activities lagged during a period when other mining powerhouses such as Australia and Brazil thrived. Poor train and port connectivity hampered exports and overall output. Similarly, the electricity sector has significantly impacted economic activity due to frequent blackouts and unreliable supply. However, improvements in electricity supply during the first half of 2024 have led to increased output in manufacturing and retail sales. Despite these improvements, the country's electricity issues are deep-rooted and unlikely to be fully resolved in the short term. The new infrastructure minister in the GNU has pledged to boost investment to address supply-side challenges, including ports, roads, the power grid and water infrastructure, which could enhance both economic output and productivity. Yet, reforms could be hindered by poor policymaking and political interests.

Inflation, which peaked at 8% in early 2023, has gradually declined to an average of below 5% and is expected to average just above 5% in 2024. However, if new infrastructure spending is initiated, inflation could rise again in 2025, remaining above 5% for a longer period of time. The central bank is currently adopting a dovish stance. In this context, we anticipate a declining trend in insolvencies and positive economic performance in the latter half of the year. External vulnerabilities have diminished, with foreign debt to GDP now at less than 40%, down from 53% in 2019 and 56% in 2020.

Since taking office, Cyril Ramaphosa has faced challenges in implementing effective reforms. Inflation, demographic pressures and the highest inequality levels in the world have made South Africa’s social contract increasingly unstable, particularly since the Covid-19 pandemic. While the immediate health crisis has passed, its social consequences remain significant. The unemployment rate is above 33% and has been gradually rising, nearing the historical peak of 35% reached during the pandemic. Similarly, school dropout rates and the number of children receiving no schooling have increased after initially declining post-pandemic. Despite South Africa leading in education spending among emerging markets, the quality of education remains a concern, contributing to persistently low productivity.

The ruling ANC party's ability to implement reforms will be crucial for the country's success. Additionally, its ability to transition from a party with an absolute majority to a senior partner in a coalition with diverse interests will be key to enhancing the predictability and effectiveness of government actions. The Democratic Alliance (DA) has taken a more critical stance on Russia's invasion of Ukraine compared to the ANC, which has maintained a neutral position. Conversely, the ANC has been at the forefront of global efforts to pressure Israel regarding its actions in Gaza.

The conflict in the Middle East has presented South Africa with an opportunity to become a focal point for global trade as traffic through the Suez Canal has been disrupted. The Cape of Good Hope has emerged as the primary maritime connection between Europe and Asia, leading to a +328% increase in containership arrivals at South African ports since December 2023. This surge in port traffic has also boosted port revenues. Implementing trade facilitation measures, such as improving port operations and cargo handling, could transform South Africa's ports into major logistic hubs connecting Asia, Europe and Latin America.