Electricity and Logistics Reforms Ignite Hope for the South African Economy

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JEREMY MAGGS: While South Africa’s economy faces considerable criticism, Johann Els, the group chief economist of Old Mutual, is challenging this narrative. He argues that the country exhibits resilience and that reforms are underway, suggesting that those predicting an imminent collapse may miss vital developments.

Listen/read: Key challenges facing the SA economy – Old Mutual

That said, the current climate is undoubtedly challenging. Unemployment is at record highs, investor confidence is unstable, the rand is under pressure, and families are feeling the squeeze. So, is Els’s perspective grounded in reality, or is he downplaying critical challenges?

Johann, it’s a pleasure having you here. You claim South Africa isn’t in crisis, but how do you reconcile this with rampant unemployment and failing infrastructure?

JOHANN ELS: Indeed, South Africa has many significant issues. We can observe numerous failures, whether in government, state-owned enterprises (SOEs), or various policies. I don’t deny that.

However, when assessing investments, we have to look ahead. We should recognize the policy shifts currently being enacted. Operation Vulindlela has been pivotal in stabilizing Eskom. We’ve also made strides in bringing the private sector into electricity generation.

Recently, we saw major announcements regarding private sector involvement in Transnet operations. This is a gradual transition; immediate benefits may not be evident, but it’s essential to note the increasing participation of the private sector in areas where the state and SOEs have struggled. Looking forward, we can expect modest improvements in economic growth.

Read: Rail reform milestone sets SA economy back on course

Though it’s unlikely to be exceptional. Jeremy, achieving a 5% or 6% growth rate appears improbable due to skills shortages, labor market challenges, and more. Nevertheless, recent developments could help us shift from the 1.1% average growth we’ve seen over the past 16 years to around 2.5% to 3%. This will take time. As Barbara Creecy noted, enacting these reforms is a slow process, but we are making progress.

JEREMY MAGGS: You mention signs of reforms taking hold. The crucial question is whether this momentum can be sustained in the medium to long term.

JOHANN ELS: Once the private sector is empowered to take on these roles—such as investments in electricity generation, wind, and solar farms—reversing that trend becomes increasingly difficult. Government initiatives like Operation Vulindlela are fostering competition within the electricity sector.

Read: South Africa has met 10% of reform targets, new tracker indicates

You’re right; skepticism arises from 15 years of slow progress and limited policy implementation. Nonetheless, changes are occurring, and as the private sector becomes more involved, reversing this trajectory will be challenging.

JEREMY MAGGS: You appear to be optimistic that these reforms, which the government has historically struggled to enforce, are beginning to produce results—pointing to potential for sustainability and ongoing momentum. What are the risks involved?

JOHANN ELS: Yes, the risks of regression are significant. We’ve seen how easily momentum can dissipate. However, Operation Vulindlela is making substantial headway, and the quarterly updates show real progress, although I recognize that it’s slower than desired and the scale is insufficient.

I see positive momentum, even if it’s delayed.

JEREMY MAGGS: Johann, how does the current relative stability of the rand reflect the economic landscape?

JOHANN ELS: This is complex. The rand is currently weaker than it theoretically should be based on fundamental inflation differentials, likely reflecting numerous negative aspects of South Africa. However, a degree of recovery seems plausible, especially with a weaker dollar. As expectations for the dollar’s decline persist—driven by uncertainties surrounding the US economy—there’s potential for the rand to rebound significantly. During the pandemic lockdown in 2020, the rand plummeted to nearly 19.90 to the dollar but improved to 13.50 within 15 months. A similar recovery could occur.

While returning to the 13 range may be unrealistic, reaching the 16 or even 15 range in the near term seems feasible. With improved growth, lower inflation, and reduced fiscal risks, I anticipate that ratings agencies will revisit their debt-to-GDP expectations, leading to potential upgrades in the coming years.

I believe the rand could be somewhat more stable in the medium to long term than we’ve become accustomed to.

JEREMY MAGGS: In closing, Johann, investor confidence is still low. Doesn’t that weaken your argument?

JOHANN ELS: It indeed takes a hit, but during periods when investors are inclined to accept more risk in emerging markets—especially when sentiment towards the US falters—I believe South Africa remains on their radar.

Read: The global economy’s unusual crossroads

We’re not a failed state. When we compare our fundamentals to those of other emerging markets, we are not at the bottom in terms of corruption. While it remains a concern, we’re not the most affected.

Foreign investors I communicate with recognize the strength of South Africa’s systems, the robust constitution, and a sophisticated financial sector, supported by trusted institutions such as the Reserve Bank and Treasury, which maintain serious checks and balances that can attract capital flows.

However, the overarching problem still lies in our lack of growth.

Looking ahead, investors with a reasonable time horizon may come to see that a greater role for the private sector in the economy might guide us towards a more favorable growth path—not extraordinary, but certainly an improvement over our current circumstances.

JEREMY MAGGS: Thank you, Johann Els, group chief economist at Old Mutual, for sharing your insights.

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