Intermediaries must understand SA’s economic growth drivers
There is a useful saying that goes ‘make no promises, tell no lies’. If only US President Donald Trump and his advisers had kept that pithy wisdom in mind when putting a four-week-or-so timeline on the joint Israel and US military action in Iran. By the time readers turned to their May 2026 desktop calendars, the conflict had already passed the nine-week mark.
Breaking free from stagnation
The economic impact of the Iran-Israel-US conflict and consequent closure of the Strait of Hormuz featured during a recent Coface webinar titled, ‘From stagnation to recovery; South Africa’s economic outlook.’ Abudl Vally, CEO of Coface SA was joined by the group’s Chief Africa Economist, Aroni Chaudhuri, to consider how South Africa (SA) might break free from economic stagnation in a world beset by rising geopolitical tensions, structural constraints and uncertainty.
Financial and risk advisers should find this topic insightful on both a personal level, because your business prospects ebb and flow with SA’s GDP growth, and because you need to be ‘in the know’ when advising your clients on how to insure or invest. “We continue to face complex domestic challenges including energy instability; labour market distortions; logistics bottlenecks; and mounting fiscal pressures,” Vally said, pulling no punches. “At the same time, our economy is deeply exposed to global developments.”
Vally explained how the Middle East conflict, through heightened uncertainty and rising oil prices, would filter through to borrowing costs, exchange rate fluctuations, inflation and interest rates, and trade competitiveness, to name a few. “Understanding how these forces interact, and the risks and opportunities they introduce, is vital for the South African community,” he said, before handing the virtual stage to his colleague. He asked the economist whether there were any specific reforms that might prompt a domestic economic turnaround.
Per capita GDP and infrastructure collapse
Chaudhuri started with a brief history of SA Inc. He described the country as an open economy that is well-integrated into the global financial systems, and was full of praise for the disciplined approach taken by the South African Reserve Bank (SARB) under its exchange control and monetary policy functions, going back decades. Around 2000, South Africa was described as being ahead of many of its emerging market (EM) peers both in terms of per capital GDP and infrastructure.
Over the period spanning 2000 to the start of the 2008 Global Financial Crisis (GFC), SA enjoyed strong growth thanks to the commodity super cycle, driven by China. According to Chaudhuri, the commodities boom coincided with low fiscal debt and impressive creditworthiness. SA took a hit during the GFC, but unlike other countries, the economy continued to decline post crisis, exacerbated by the 2011-12 European sovereign debt crisis and the end of the commodities cycle, from 2014. And then, the 2020-21 COVID pandemic unfolded.
The economist compared SA with a handful of its EM peers in Asia and Latin America, including Brazil, Chile, Colombia and Malaysia. “These countries experienced similar shifts in the global economic cycle, but SA is the only country where the level of GDP per capita has actually declined from 2007 to now,” Chaudhuri said. There are domestic challenges at play that supersede global economic cycles, including crime and corruption and severe electricity, logistics and water constraints, to name a few.
Measuring potential growth
Your writer was saddened by the observation that SA, despite its promise, is perhaps the only economy to boast a 2026 per capita GDP lower than its 2006 number. Chaudhuri set out to identify the constraints using theoretical macroeconomics grounded in what economists call the potential growth of an economy. “This is the level of growth that your economy can sustain at full capacity utilisation across industries, and at full employment,” he explained. It turns out that SA’s potential growth has fallen in line with its real GDP.
Capital and labour stood out as the core structural issues. “The stock of capital has constantly depreciated since 2010 … investment, which is [a proxy for] capital formation, has been insufficient,” Chaudhuri said. Analysts and economists have identified cost of capital, energy supply constraints and reduced demand for commodities as reasons for declining investment. Ideally, labour-backed growth should compensate when capital declines, but SA lagged its peers in this measure due to what the presenter described as “strong labour disruptions.”
Vally asked to what extent fiscal policy and public debt reflected in the country’s economic stagnation? The key issue here appears to be that public spending has been massively inefficient. The economist used the concept of a fiscal multiplier to illustrate how little businesses and citizens were receiving for each rand of government expenditure, arguing that SA’s fiscal multiplier was close to zero, if not negative over recent years. Stated more explicitly, the state is spending too much on wages and too little on growth-supporting infrastructure.
Resuscitating the fiscal multiplier
The challenge facing SA’s Finance Minister is that he cannot use taxation to grow revenue; he needs the economy to grow ahead of inflation to reduce debt and restore the fiscal accounts.
“It is not only a question of healthy public finances; it is about making that fiscal multiplier go into the positive again, so that your public spending actually generates some amount of growth,” said Chaudhuri. His comments reminded your writer of the free trade, property rights and sound monetary policy ‘recipe for economic growth’ touted by Efficient Group economist Dawie Roodt, and often reported on by FAnews.
Toward October 2025, SA’s economic growth outlook was improving; but then Trump happened. There are various channels through which the Middle East conflict will transmit to the domestic economy, starting with the twin-issue of an economy heavily reliant on oil but with insufficient refining capacity. SA relies on oil for agriculture and transport, and burns billions of litres of diesel to stabilise its electricity grid. “Assuming South Africa has secured whatever supply they need in terms of oil demand, it will obviously be done at higher prices,” Chaudhuri said.
In this context, the Middle East conflict will primarily transmit to SA as an inflation and, potentially, an interest rate shock. Consumers will suffer, and as a result, so will the country’s consumption-expenditure-dependant GDP. Readers hoping for the mining sector to pull the country out of the mire, as it has so frequently done in the past, will be disappointed, because the sector has been languishing for some time on the back of electricity, logistics and policy concerns.
SARB to target 3% inflation
On the plus side, investors are confident the SARB will respond appropriately to global macro factors that should be short-term in duration. “We expect that the reaction to inflation in terms of monetary policy will be quite optimal,” Chaudhuri said. “It will perhaps put a bit of pressure on the economy … but it will stay focused on the 3% inflation target.” Consumers can expect interest rate hikes to rein in any conflict-related inflationary spikes, but within clear, managed timeframes.
Going forward, the country should push for energy self-sufficiency by further reducing its fossil fuel dependencies. Vally commented on economic and political uncertainties that were preventing crucial manufacturing and mining businesses from investing capital at the end of their current lifecycles. “People are just not feeling certain enough to invest fixed capital over the long term,” he said. Inequality and unemployment were mentioned as key structural issues that SA will have to address to return to 2% or higher GDP growth.
One of the key trends preventing SA from addressing its unemployment crisis is the ongoing shift from an industrialised economy to one focused on services. The economist singled out industrialisation as a driving force for employment and skills development; but SA and many of its EM peers have all but abandoned industry and manufacturing, allowing China to gobble up 40% of the world’s manufacturing capacity. The shift was described as complex, and deserving of a separate platform to unpack fully.
Being well-informed for economic success
Vally posed the final question, asking how SA might turn a fragile recovery into sustained growth. Chaudhuri encouraged the audience to study and understand the country’s economic constraints, saying that being well-informed was the first step to weathering the global economic storm. The second step is to find ways to adapt to and circumvent crises by seeking out the niche opportunities they present.
Writer’s thoughts:
This frank assessment of SA’s economic growth record and prospects glossed over government’s role in the country’s decade-long GDP growth slump. Can the private sector power SA back to 2% or higher GDP growth without a significant rethink on policy? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
