SA STILL JUST SCRAPING BY

South Africa will likely avoid a populist disaster after 2024 but continue to muddle through, slowly overcoming its challenges. Unfortunately, progress will be too slow to transform the economy, so for the poor and unemployed there will be little to celeb

Each day South Africans wrestle with the question of whether the country is falling irrevocably apart or whether there is just enough goodwill in society and positive reform momentum in the government to halt the slide and restore the country to growth and prosperity.

Political and economic analysts are not fortune-tellers, and very few are prepared to put odds on the country’s deeply uncertain future. But BNP Paribas regional chief economist

Jeff Schultz and independent political consultant to BNP Nic Borain have done just this, crafting three plausible scenarios of what the future could hold for the country in terms of the political economy.

It’s neither as good nor as bad as you’d expect.

In their base case, “Scraping By”, to which they attach a 50% probability, South Africa continues to “muddle through” in much the same way as it has done in the recent past, with growth averaging a desultory 1%-1.5% over the next three years.

The ANC secures just below 50% of the vote in the 2024 election, but not less than 45%, and is able to find alliance partners that do not derail its current policy direction, possibly the IFP at a national level.

President Cyril Ramaphosa stays in his post until 2027 at least. His anticorruption efforts, policy reforms and key infrastructure investments gradually accelerate and emerge as the dominant priorities of the ruling party. But the process remains poorly organised and contested, so the economy responds only slowly.

As such, South Africa’s fiscal position remains risky. Meanwhile, social unrest is high but remains localised and manageable.

The key difference between then and now is that Schultz and Borain expect much lower load-shedding by the second half of 2024, and only occasional and mild load-shedding by the first quarter of 2025. This is thanks mainly to the rapid pace and huge scale of private investment in energy selfgeneration now under way.

This will make life much easier for most South Africans and will increase GDP growth and confidence, and lower inflation.

Unfortunately, the analysts are far less bullish on Transnet overcoming its logistics challenges and, with no easy workaround for the private sector, it is expected to continue holding growth hostage. (Schultz estimates that if the infrastructure issues dogging road, freight rail and the country’s ports could be resolved, this could boost economic growth by 1.5-2 percentage points a year.)

“Transnet has a very large problem which will require either a lot of money or a lot of private participation — probably both,” says Schultz.

Unfortunately, it is clear that Transnet remains far from implementing the private participation that has already been announced for the Kroonstad rail line and Durban harbour. It hasn’t even begun the process of tendering for the systemically important lines — the Joburg to Durban freight corridor, the coal line to Richards Bay, and the Sishen-Saldanha line. Schultz thinks it unlikely that private operators will begin managing these lines in the next 18 months.

The recent resignations of several Transnet executives may improve the picture, depending on who is appointed and the quality of the board’s turnaround plan, Schultz concedes.

However, he points out that that still leaves Transnet with big capex problems and a government “that still doesn’t seem to have a clear-cut strategy and timeline to address the glaring regulatory hurdles for South Africa’s transport policy, even if the right players are in place”.

Of course, the public won’t experi

ence the problems at Transnet’s ports and freight rail firsthand, which is why 2024 will be more about “steadying the ship” in terms of what the voter base feels rather than what South Africa actually needs rapid growth to boost public finances and reduce unemployment.

“What won’t fully disappear [in the base case] is still-muted growth and government’s fiscal constraint,” explains Schultz. “This means we can expect most public services to remain of relatively poor quality and unemployment to remain high.”

In short, the base case over the next 18 months is not particularly positive, aside from the expected energy recovery. It suggests that the country will continue to scrape by or muddle along with many of its social and economic problems intact, except with some economic upside from greater policy certainty and investment in energy.

The authors also feel that more caution is warranted over the potential for Operation Vulindlela (OV) the joint presidency and National Treasury task team that is spearheading economic reform to succeed in transforming South Africa’s growth outlook.

Their view is that while good policy lays the basis for positive change (especially in energy), South Africa’s logistics infrastructure is deteriorating at an accelerating pace. Given this, and the fact that global conditions and domestic GDP growth are more fragile than in 2019, they warn that “the positive OV story and ideological shifts in the ANC are necessary, but not sufficient, conditions to raise trend growth in the next 18 months”.

In other words, while they think OV’s reform drive will generally be supportive of growth, they are not yet convinced that it will be transformative.

Schultz and Borain call their bull case, to which they attach a 30% probability, “The Virtuous Cycle”.

In this scenario, the ANC retains its majority, securing more than 50% of the vote in the 2024 election, allowing Ramaphosa to comfortably serve out his second term in full.

Growth rises to average 2.5%-3% as anticorruption efforts, policy reforms and key infrastructure investment gather momentum and become the dominant characterisation of the political and policy environment over 24 months.

Energy policy and infrastructure undergo a step change: private generation stems load-shedding by the final quarter of 2024, while the regulatory issues that inhibit greater private participation in Transnet’s monopoly sphere are resolved, allowing export volumes to grow strongly while infrastructure improvements in ports, rail and electricity generation allow increased output.

What follows is the “substantial upside transformation” of the economy, supported fortuitously by positive global conditions.

Social unrest eases over the medium term as economic growth, service delivery and infrastructure return to acceptable levels. The Treasury stays well ahead of fiscal pressures by keeping a lid on public sector wages and limiting bailouts to state-owned enterprises.

“The Vicious Cycle” is the name BNP Paribas gives its worst-case scenario, but it attaches only a 20% probability to this coming to pass.

In this scenario, the ANC gets only 40% of the vote or lower and enters a coalition with the EFF, effectively merging with that party. EFF leader Julius Malema returns to office and Ramaphosa steps down or is sidelined in favour of Deputy President Paul Mashatile.

Reform efforts become bogged down in political infighting and incompetence. Regulatory reforms in the energy sector are wound back, and there is a more statist-driven and populist approach to policymaking which derails growth and investment. The fiscal position deteriorates sharply.

“In this scenario growth would limp along at 0% at best, and possibly even turn negative, as the policy authorities may have to step in to tighten financial conditions considerably to stem a potentially strong tide of portfolio outflows,” explains Schultz.

Fortunately, the authors don’t see an ANC-EFF coalition as inevitable or even likely, saying it is just too early to call and there are many hurdles in the way from both sides.

“Such a coalition would suggest a massive negative policy shift,” says Schultz, “We think policy continuity is, in fact, much more likely than not.”

The authors attach a slightly higher probability to the virtuous cycle (30%) than the vicious cycle (20%) because there is little to suggest a strong desire for outright populism either in the country as a whole or within the ANC, or signs that the ANC is panicking before next year’s election.

“Our view,” says Schultz, “is that South Africa’s institutional framework — encompassing the Treasury, the South African Revenue Service, the Reserve Bank and the National Prosecuting Authority, among others — is the strongest it’s been in the better part of the last decade. So today, there are stronger forces turning away from the vicious cycle compared with the previous administration.

“At the same time, the structural weaknesses in the state and its capacity and constraints are so severe and deeply entrenched that it’s hard to attach a higher probability to our virtuous cycle outcome, even though it is still higher than the absolute worst case.”

In sum, Schultz and Borain have developed a fairly sanguine analysis in which life carries on much as usual after the election, most likely under an ANCdominated coalition in which the reformers around Ramaphosa gradually gain the upper hand.

The upshot is that while progress continues to be hard-won and slow — too slow to produce any solid gains in the fiscus or employment — there is progress. So, instead of the country slowly imploding, things slowly improve.

Though if you are poor or unemployed, there will be little to celebrate.

Of course, if you add the base case and the virtuous cycle together, you get an 80% chance of things turning out OK or quite well for South Africa as opposed to only a 20% chance that things could fall apart completely.

However, this is not how Schultz and Borain see it.

In their view, not even their best-case scenario is the least bit idyllic. “For South Arica, there is a hard road ahead,” the authors warn. “The question is: how hard?”