South Africa held elections last month in which the ruling ANC’s grip on power was broken for the first time in 30 years. Voters will be hoping that the new, coalition government – which includes the ANC and its long-time rivals, the Democratic Alliance, plus some other parties – can reverse the country’s long period of economic stagnation. In PPP-adjusted international dollars, South Africa’s GDP per capita is lower now in real terms that it was in 2008; and it has been overtaken by China, while India is catching up.
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South Africa’s unemployment rate is above 30%, according to official data, and it may be even higher unofficially, if you include discouraged workers who have given up looking for work.
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The election results emerged on 2 June and the coalition was agreed on 14 June. Investors have welcomed the new government, with the rand and the country’s government bonds both rallying once the details of the coalition were announced.
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The stronger currency and decline in government borrowing costs will be welcome news for the new administration as it starts its agenda. The stronger currency is a sign of improved investor confidence and that, together with any pass-through to inflation, which remains within the South African Reserve Bank’s target range of 3-6%, could make it easier for the bank to cut its key policy rate, which currently sits at 8.25%.
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The new administration has little wiggle room for more spending without increasing taxes, though, as the country’s public finances are not in good shape. Although debt is lower than in many advanced economies, the debt to GDP ratio of 67% is considered elevated for an emerging market, and is the highest it has been in at least 60 years. The lack of economic growth means the tax base has not increased as quickly as hoped, while the denominator in this calculation is lower than it ought to be as the country’s economy has stalled. Government assistance to the state-backed electricity provider Eskom has also contributed to the recent deterioration.
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Despite the assistance to Eskom the country has suffered from chronic electricity blackouts which have dented economic activity, sapped business confidence and annoyed residents. And even though the country’s sunny climate is conducive to cheap solar electricity (the country ranks in the top 20% of countries on clean energy potential, according to Fathom’s Energy Transition Scores dataset) just 9% of the country’s electricity came from renewable sources in 2022 – much less than the global average, which is close to 30%. Harnessing this potential and increasing renewable electricity generation further will help South Africa to meet climate targets, alleviate chronic electricity shortages and bolster its economy.
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South Africa should be an energy transition winner, thanks to its good clean energy potential, as well as its abundant reserves of manganese, chromium and other minerals essential to the energy transition. The rise in the price of manganese, a commodity in which South Africa has the largest known reserves, since April is an economic tailwind.
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While there are reasons to be cheerful, it will take more than investor optimism, unlocking clean energy potential and higher commodity prices to sort out South Africa’s problems. Reducing the country’s sky-high unemployment rate, improving social services, combating crime, rooting out corruption and confronting powerful coal mining unions opposed to a switch to renewables are among the tasks awaiting the new government.
The views expressed in this article are the views of the author, not necessarily those of LSEG.
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