South Africa

Modest GDP growth is in the air for South Africa this year (+1.4%). After an expected increase of +0.7% in 2023, output in the energy-intensive mining sector and manufacturing is likely to return close to pre-pandemic levels, thanks to an increased availability of electricity, some electoral spending, tourist inflows and resilient internal demand. Overseas visitors increased by +47% y/y to 1.9mn between January and November 2023, while African visitors increased by +53% to 5.8mn.

Social unrest and violent events are likely to intensify while the governing coalition between the ANC, the party in power since the end of apartheid, and the Democratic Alliance (DA), viewed as aligned with the interests of the white minority, takes its first steps. The need to rein in government spending, increase foreign investor confidence and curate idiosyncrasies among public entities also poses risks to the outlook.

Electricity generation poses the heaviest drag on growth, with the national utility being able to work at only half of its nominal capacity. This lack of reliable electricity supply hinders businesses, industry and households from realizing their potential. While labor unions are likely to mobilize strikes in opposition to loosening local content rules for new generation capacity, it is unlikely that sufficient capacity will materialize in the next 12 months.

Inflation remains under control since the peak of 8% in early 2023 and is likely to return to a 4% average, with the central bank taking a dovish approach by year-end, though at a slower pace than previously expected. Against this backdrop, we still expect a declining trend in insolvencies and a positive economic performance in the second half of the year. External vulnerabilities have reduced, with foreign debt to GDP now at less than 40%, down from 53% and 56% in 2019 and 2020, respectively.

The country is less competitive than its peers due to its distance from global markets, high labor costs and an extractive economic structure. Increased strikes and unrest risks are a result of an exacerbation of the political discourse and inter-union conflict, particularly in the mining industry. At the same time, the government of national unity called for by the ANC in the aftermath of the May 2024 elections brought the main opposition party of the last legislature into the majority, in a move that calmed investors compared to other possible scenarios, which would have seen government action slide toward more populist or personalistic policies.

However, several governments have shown so far a limited ability to conduct effective policy, compounded by demographic pressures, competition between groups and unions in countering unpopular measures, inequality heightened by the crises of recent years and, more recently, an increase in the cost of living. The capability of the ruling ANC party to handle its own transition from a from a party with an absolute majority to the senior partner in a coalition with few common traits will be key to increase the predictability and effectiveness of government action. The DA has been more critical of Russia's invasion of Ukraine than the ANC, which has adopted a neutral position, and runs the Western Cape province, broadly considered South Africa’s best-run province. Given the highly polarized political framework, the present coalition could permanently undermine the ANC's political capital, dissatisfy voters in both camps and pave the way for increased social unrest in the short- to medium-term.