GNU holds the key to foreign investment, job creation and stellar economic growth

South Africa’s future GDP growth hinges on the ability of the Government of National Unity (GNU) partners to collaborate effectively in tackling critical challenges, including healthcare, labour and economic reforms writes Arthur Kamp, Chief Economist at Sanlam Investments.

The Government of National Unity (GNU) has embarked on a reform path underpinned by mostly centrist economic policies and respect for the Constitution. This is good news for South Africans.

GNU and reform-driven growth

While the domestic macroeconomic outlook will be significantly influenced by inflation and interest rate trends in developed markets, South Africa’s GDP growth will hinge on the ability of GNU partners to find common ground in areas like healthcare, international relations, labour and procurement – and their commitment to economic reforms.

The loose political alliances formed post-elections will probably face major tests in the next round of local elections, likely in 2026, and the 2027 African National Congress (ANC) party elections, which will test support for President Cyril Ramaphosa’s reform initiative. If the GNU survives these challenges, it could pull South Africa out of its decade-long “doom loop”, which has reduced real economic growth potential to around 1%. This low growth has placed significant pressure on government finances, further strained by rising unemployment and an increasing number of citizens dependent on the state for welfare grants.

The “doom loop” culminates with the “crowding out” of the private sector and lower foreign capital inflows due to insufficient potential returns on investment.

We hope that economic reforms under the GNU will steer South Africa towards a higher growth scenario. The alternative – a slide towards populism – would be fiscally catastrophic.

Global inflation and interest rates

As the world’s reserve currency, the US dollar sets the tone for emerging market currencies and interest rates, including South Africa’s. The US Federal Reserve (Fed) serves as the global benchmark interest rate.

Given disinflation and a softening labour market, the US Federal Reserve has commenced its interest rate-cutting cycle by lowering the Federal Funds Target Rate by 50bp in September 2024. The US policy interest rate remains far above the neutral rate and further significant interest rate cuts are expected into 2025.

These cuts should lead to easier global financial conditions, reduce pressure on emerging market currencies, and, hopefully, do the same for emerging market interest rates.

That said, three structural forces could keep inflation stickier than expected over the medium to long term, thereby restricting the extent to which interest rates ultimately fall: geopolitical risk, which is reigniting global supply chain pressures;  increased global protectionism and loose fiscal policy.

Domestic outlook

The South African Reserve Bank (SARB) has done a sterling job in maintaining its inflation target. However, stable inflation coupled with rising bond yields has resulted in lower private sector borrowing and investment. Real credit extension remains negative and has not recovered strongly since the 2008-9 Global Financial Crisis. Without private sector borrowing, the economy cannot grow to its full potential. Infrastructure is another constraint, with the SARB estimating that load shedding cost the country 1.5% in GDP growth last year.

Sanlam Investments believes that 3% annual GDP growth is achievable over the long term if the economic reforms targeted under Operation Vulindlela are implemented successfully. This project, a joint initiative of the Presidency and National Treasury to accelerate the implementation of structural reforms and support economic recovery, is gathering momentum, thanks to many of the necessary legislative reforms finally being put in place. Electricity has been the primary beneficiary so far, but if the government can emulate its electricity successes in transport and other critical areas of the economy and implement its reform programme successfully, it may reignite foreign capital inflows.

Amid downside inflation surprises, the SARB cut its repo rate by 25bp in September 2024.  Sanlam Investments expects the local repo rate to possibly decrease from the current 8.25% to around 7.0% by mid-2025. Households should also start to benefit from the success of Operation Vulindlela if medium-term GDP growth trends towards the expected 2%-3% range.

Disclaimer: Sanlam Investments consists of authorised financial services providers in terms of FAIS and disclaimers can be viewed on www.sanlaminvestments.com.