Four tips to make South Africa more investible
Inflation and interest rates will dominate economic and investment outlook presentations during 2025, as financial decision makers contemplate the inflationary impact of geopolitics and international trade wars. Kevin Lings, Chief Economist at STANLIB, told the audience at the Glacier Investment Summit, held at Emperor’s Palace, Johannesburg, that countries were nervous about the sustainability of recent inflation ‘gains’.
Trade tariffs will be inflationary
He warned of the inflation risk if United States (US) President Donald Trump pushes ahead with proposed tariffs against Canada (25%), Mexico (25%), and China (10%), and hinted that central banks were more cautious about further interest rate cuts against the backdrop of trade uncertainty. “In South Africa, you can [already] see that the Reserve Bank is a bit reluctant to cut interest rates further; they may cut once more but the threat of tariffs is making them very nervous,” Lings said.
The dovish US Federal Reserve is expected to go into an interest rate holding pattern as it digests the inflationary impact of Trump 2.0. “The Fed have also got a bit of a problem in terms of inflation going in the wrong direction: at the moment it sits closer to 3% than 2%,” Lings said. The bottom line is that you and your clients cannot chart a financial planning course on the basis of further interest rate cuts. On the plus side, the world’s largest economy looks certain to underpin global economic growth over the coming year.
According to Lings, households in the US are “the wealthiest they have ever been.” Yes, there are concerns over the US’ fiscal debt; but you are dealing with an economy that boasts 2-2.5% annual GDP growth and a mere 4.1% unemployment rate. The labour market is strong, with the economy adding around 200000 jobs per month, and around 8 million advertised job vacancies. Having set the scene for growth, inflation, and interest rates, the economist shared four focus areas for investment decision makers and government policy makers to keep in mind.
The Trump 2.0 effect
First, the Trump 2.0 effect. “You can like or dislike him, and you can like or dislike what he does; but I want to show you the best thing that he is doing for the US, and explain its relevance in a South African context,” Lings said. It turns out that Trump appreciates the contribution that small businesses make to the economy, and knows how to keep them happy. This matters, because over 99% of the US’ 34.8 million businesses sit in the small business space, chipping in with around 60% of all employment opportunities since 1995.
“US small business confidence has surged since Trump was elected; it has gone to the highest level in 23 years,” Lings explained. He noted that in the context of 2-2.5% GDP growth, low unemployment, and record levels of business confidence, it would take a brave analyst to bet against the US economy in the short run. Small business confidence went off the charts in November 2024, coinciding with Trump’s election, and in response to his campaign promises to deregulate the business environment.
Unfortunately, the pro-growth spin-off of setting business ‘free’ is lost on South Africa’s political elite. A recent study by the International Monetary Fund (IMF) ranked our beautiful country last out of 47 countries based on the level of business regulation. “Business employs people; business invests; business expands; business pays taxes; and business grows your economy – not the government,” Lings said. He hinted the quickest GDP growth ‘fix’ for South Africa Inc would be to make it genuinely easier to conduct business.
Consumers cannot carry SA forever
Enter the second observation, around the low- or slow-growth ‘strangle’ that South Africa faces, and our overreliance on household consumption expenditure to achieve growth. “Over the last 10 years, we have grown our country GDP by an average of less than 1% per year; it fits into the ‘dreadful’ category,” Lings said. And it gets worse. It turns out our low growth outcomes are a combination of a sideways-trending manufacturing and mining sector, and an overreliance on consumption spending.
Lings was not holding his punches, dismissing government’s continued claims that it would revitalise growth in the aforementioned sectors: “We are unproductive, uncompetitive, and [burdened by] weak infrastructure.” He was, however, full of praise for the private sector, saying that business was doing a great job to keep growth in overregulated sectors trending sideways rather than down. “The second thing I wanted to get across today is that 138% of the economy’s growth over the past decade has come from consumption,” he said. “Without shopping, we don’t have a country.”
The solution is for government to create an enabling environment to make it easier for businesses to ply their trade and to free up key private sector decision makers to invest in South Africa. Data suggests that local businesses are ‘sitting’ on over R1.4 trillion because they are not confident enough in the country’s prospects to deploy this cash to employment, expansion, or investment. According to Lings, these businesses are sitting on the fence “because out of 47 countries, South Africa [offers] the most regulated business environment.”
The ‘false flag’ of GNU optimism
The economist then contrasted the record spike in US business confidence under Trump 2.0 with the soft uptick in confidence seen locally following the formation of the Government of National Unity (GNU). Not only was the improvement unimpressive, but overall business confidence remains in negative territory, below 50 points. This is a problem steeped in politics, not economics!
As an aside, recent cracks in the GNU have developed out of ideological differences around control of key pillars in the economy including education (the BELA Act); healthcare (the National Health Insurance Act); and property rights (the Expropriation Act). And readers can be excused for feeling a trifle disillusioned given government’s ongoing trend towards centralisation and state intervention across the socioeconomic sphere. Each of these policies will send South Africa further down the ‘level of regulatory freedom’ rankings, delay the desired private sector balance sheet unlock, and dissuade foreign direct investment for years to come.
“We are not unlocking South Africa’s most important asset, the corporate balance sheet; but we will unlock the consumer balance sheet by allowing people to spend their long term retirement savings going shopping,” Lings complained, referring to the recently implemented two-pots retirement solution. He singled out the country’s infrastructure readiness as a key constraint that would have to be addressed to unlock corporate balance sheets, introducing the third key focus area for economists and politicians to consider.
Nothing to boast about
The latest Infrastructure Report Card for South Africa, published by the South African Institution of Civil Engineering (SAICE), reveals that our infrastructure has slipped from C-minus in 2011 to a D-minus in 2024. The report describes a D-rating as ‘at risk of failure’, hardly a foundation for long-term economic success. Lings estimated it would take at least R100 billion per annum to prevent the country’s infrastructure slipping into the E-band, which is classified as ‘unfit for purpose’.
The power of unlocking business balance sheets is illustrated in the private sector’s response to Eskom’s woes, with around 6000 megawatts in solar power added to the grid, rapidly. But attempts to privatise Transnet’s assets have been less successful as government seeks to retain control at any cost. In your writer’s opinion, solar happened because government had no choice. The Department of Energy and the state-owned entity (SOE), Eskom, made relaxations to allow rapid solar and wind projects, and are now figuring out ways to take back control, by, for example, forcing businesses and households into a costly solar installation registration process.
The fourth and final point on Lings’ presentation agenda was to highlight South Africa’s investment potential. He said that it was possible to lift the country’s economic growth number, before calling on government to create an enabling environment to unlock corporate balance sheets and lure back foreign direct investment. His parting slide was impactful, showing how foreign investment in South African equities had slipped from around USD75 billion (1994-2011) to net zero (2012-2015) to a multi-year outflow starting 2016.
Unlocking our investment potential
“Foreign investors sold [off their interest in JSE equities from] USD70 billion down to like USD10 billion; they have been net sellers of local equities in each of the last 20-months,” Lings said. The dream is for government to unlock South Africa’s investment potential by addressing infrastructure gaps and through sensible policy making and regulation. “If we can find a way to unlock private-public participation in infrastructure, and the private sector unlocks the corporate balance sheet, we will see business confidence improve, and the economy starting to grow,” Lings concluded.
Writer’s thoughts:
For financial advisers, the equation is simple: a thriving economy leads to stronger investment returns for clients. What will it take for South African businesses to unlock their corporate balance sheets to expand operations and create jobs? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
