South Africa has always skated close to the edge, but as the negatives pile up — simultaneous energy, logistics, unemployment, education and governance crises, along with increasing assassinations and kidnappings — there’s a sense it is sliding into a gulf of despair.
Certainly, the national mood has seldom been as grim.
In a recent Institute of Race Relations (IRR) survey, three-quarters of respondents said their lives had not improved over the past five years. A Social Research Foundation poll last month — a geographically and demographically representative survey of registered voters — showed a significant majority of South Africans, regardless of race, income level or political persuasion, believe the country is moving in the wrong direction.
When the IRR asked whether respondents thought life would be better or worse five years from now, about half said they thought their lives wouldn’t improve, while a third said they thought they would. This reflects the deep ambivalence South Africans feel about the future.
“As South Africans we sense the change in our circumstances and our environment, but we can’t see exactly where we’re heading,” IRR CEO John Endres tells the FM.
He believes South Africa is in a “messy and unpredictable” transition. The once promising developmental state, he says, is becoming enfeebled. That’s creating heightened risk — but also opportunities for an innovative private sector and vibrant civil society seeking an alternative to big government.
Of the many analysts canvassed for this article, the most hopeful think the country will capitalise on its emerging strengths and deepen existing reforms to raise the growth rate sustainably above 2% over the medium term.
Others think South Africa will continue to muddle through like any other poor, developing country where life is tough but neither the best nor the worst ever happens.
The more bearish expect the country to do just enough to pull out of its downward spiral and avoid a sovereign debt crisis. For that to happen, however, South Africa will need to dodge some huge downside risks.
The most brutal view is held by Eunomix CEO Claude de Baissac. He puts 80% odds on South Africa experiencing a debt crisis by 2025 and becoming a failed state by 2030 — and he believes he has the structural economic analysis to prove it.
The economy has entered a death spiral; a positive feedback-loop crisis that can only be fixed through the complete overhaul of just about every aspect of it
— Claude de Baissac
“The economy has entered a death spiral; a positive feedback-loop crisis that can only be fixed through the complete overhaul of just about every aspect of it,” he tells the FM. “It starts at the top. The government is inept and is going to face a debt reckoning, as expenditures are dictated by politics and revenues are dictated by economics.”
De Baissac is particularly worried that South Africa will face a protracted period of political uncertainty and policy stagnation after the 2024 elections, no matter the outcome of the vote.
“We should not discount the possibility of the floor giving in during that period and the economy entering free fall,” he adds. “These things do happen. South Africa is ripe for such a crisis.”
These are the kinds of doomsday predictions that send chills down South Africans’ spines. Until recently they were confined to the fringes, but as firms buckle under extreme load-shedding, mainstream business leaders are becoming apocalyptic in their warnings.
Last month, MTN boss Ralph Mupita warned that South Africa risks spiralling into a failed state unless it deals decisively with the crises of energy, logistics, crime, corruption and youth unemployment.
FirstRand CEO Alan Pullinger has been equally blunt, warning that South Africa’s bromance with Russia poses a “catastrophic risk” to the economy. “It’s a dangerous path we’re going down,” he said, “and it matters a lot more than people think.”
Discovery Group CEO Adrian Gore, however, remains characteristically upbeat.
“We can’t allow the pessimists to corrupt our outlook on the country’s potential or convince us that we are already in, or are heading towards, becoming an irreversibly failed state,” he says, writing for News24.
South Africans should not underestimate “the capability and agility” of the private sector, which has adapted and grown to fill gaps vacated by the state, Gore adds. “Just look at how quickly a renewable-energy sector is forming to counter Eskom’s incapacity.”
Certainly, South Africa does have some indispensable strengths, but many of these are on the wane or are offset by equally powerful negatives. What is undeniable is that South Africa is in the throes of structural economic decline. It began in 2009 with the administration of Jacob Zuma and has lately been gathering pace.
A tale of two ages
Endres divides South Africa’s democratic era into two periods. The first “gilded” age (1994-2007) coincided with the administrations of Nelson Mandela and Thabo Mbeki. The state was broadly competent and enabling — a classic developmental state that allowed for rapid economic growth, educational gains, rising incomes and job creation.
The second age (2008-2022) encompasses the decade of state capture under Zuma’s administration and includes President Cyril Ramaphosa’s first term. During this period, says Endres, South Africa shifted to become a “detrimental” state — its policies and lack of capacity are now more of a hindrance than a help to the economy.
“In a detrimental state you would typically see large infrastructure projects being planned and initiated, but never quite completed as they become mired in corruption and price inflation,” explains Endres. “A culture of impunity takes hold alongside a high tolerance for incompetence and underperformance. Public services become worse over time, while the economy stagnates or shrinks, and people become poorer.”
Look at the numbers, and the difference between the two ages is stark.
In the first, fixed investment rose from 15% of GDP to 19%; in the second, it dropped to 13%. In the first age, the economy added 5.3-million jobs; in the second, it created fewer than 1-million. Public debt halved in the first age but tripled in the second.
GDP growth dropped from an average of 3.6% in the first age to 1.3% in the second. On a per capita basis, the average South African increased their income by more than R20,000 in the first age but, taking inflation into account, became R1,600 poorer in the second.
At 110 months, South Africa is now in the longest downward phase of the business cycle since 1945. It’s no exaggeration to say business confidence has been depressed for a decade.
South Africa has been mired in a crisis of low investment and slow growth for more than a decade. Its growth drivers and fiscal buffers are utterly depleted just as the political landscape is becoming complex and unpredictable
— What it means:
Despite this, the consensus among private economists is that after a bleak 2023, real GDP growth will edge up towards 2% by 2025 as a private sector-led fixed investment boom in green energy takes off, substantially reducing the impact of load-shedding. Greater involvement by the private sector in ports, rail and infrastructure will also start to pay dividends, while a sharp fall-off in inflation will boost consumer spending.
It all sounds good — but for the stumbling blocks of intense load-shedding, declining confidence, worsening crime and the prospect of an unstable coalition government emerging after next year’s elections.
De Baissac thinks most economists are too fixated on short-term factors such as load-shedding and the collapse of the state-operated logistics system as the primary causes of slow growth.
He points out, for example, that between 2010 and 2022, excluding the two pandemic years, the National Treasury overestimated growth 10 times — much like the prevailing consensus at the time. Only, this was a period in which South Africa experienced “a structural growth collapse”, with the growth rate declining steadily from 2.1% in 2010 to 0.1% in 2019.
Eunomix doesn’t forecast growth on a three-year view. It builds models that incorporate the long-term drivers of structural decline, including deindustrialisation and the collapse in productivity — trends De Baissac doesn’t see changing as long as political elites bury their heads in the sand.
“The growth collapse of the previous decade had very little to do with either Eskom or Transnet,” he explains. “Even generously assuming that these are fixed in the next year or so, the economy would come out gravely depleted of productive capacity, and far less attractive than even today.”
Take the steel and engineering sector. It forms the backbone of industrialisation — yet, over the past 15 years its output has declined 1.2% a year on a compound annual basis. Over that same period, it shed 35,590 jobs and reduced its contribution to GDP from 3.9% to 2.5%.
The Steel & Engineering Industries Federation of Southern Africa (Seifsa) blames a lethal cocktail of a lack of infrastructure spend, weak demand, rapid import penetration, crippling input cost increases and unreliable municipal service provision, among other issues.
With margins already paper thin and many firms in survival mode, the electricity crisis threatens to tip the sector over the edge.
In a recent survey, Seifsa found that 24% of its members had shed a combined 9,432 jobs as a direct result of load-shedding over the past 12 months; 43% had cancelled planned investments worth R2.64bn; and almost 80% had invested a combined R986m in alternative energy solutions. Unfortunately, these were mostly diesel generators, which raised firms’ monthly input costs by 25%.
In other words, companies are sacrificing scarce long-term capital for their immediate survival, with adverse implications for South Africa’s global competitiveness and the sector’s long-term sustainability.
The construction industry is in a similar state. It shed 25% of its workforce between 2017 and 2020, and profit margins shrank from 3.5% to just 2.2%. Unbelievably, the sector is now 23% smaller than it was in 2019, according to Stats SA.
The industry’s decline dovetails with a 40% drop in public sector infrastructure spending, from a peak of R194bn in 2016 to R116bn in 2020.
“Forget about the proverbial frog in the boiling water that’s been getting progressively hotter. The frog’s fried and the water’s evaporated,” says Deon van Zyl, chair of the Western Cape Property Development Forum.
“[The government’s] inability to procure, let alone deliver on infrastructure, is seeing our country collapse, physically and economically,” he says.
Then there’s the mining sector. Despite a multiyear commodity boom, its output was 8% lower in 2022 than in 2019, according to Stats SA.
The Minerals Council South Africa says the sector has been hamstrung by unclear or continuously changing mining charter requirements for prospecting rights, “a disastrous” cadastral system for mining rights administration, and severe backlogs in the processing of exploration and mining rights.
The upshot is that exploration has virtually ground to a halt and net investment, especially in new projects, has dwindled to almost zero. To compound it all, the council estimates that “crippling” constraints in state-supplied electricity and transport logistics have caused the sector to miss out on R85bn worth of exports over the past two years.
The causes are numerous but an inept state lies at the heart of the economic slowdown. Its policies and incapacity have been a drag on the economy and contributed significantly to waning productivity. (Between 2015 and 2019, total factor productivity declined more than 10%.)
South Africa’s serial underperformance reflects a failure to get on top of the long-standing structural constraints that have raised the cost of doing business and made it a less and less attractive investment destination.
Turning this around will require an enormous effort at all levels of society.
“Yet, as the limp cabinet reshuffle indicates, there is simply no political will to do anything more than a sprinkling of crisis management here and there,” notes De Baissac. “Sure, it’s good to see some reform in the energy and transport infrastructure sectors. But that’s emergency management — triage in the overwhelmed casualties’ department.”
As for further structural decline, he projects median growth of -0.2% for 2023, 0.2% for 2024 and -0.3% for 2025 — and reaches horrifying conclusions about what is likely to happen next.
“When I think of South Africa, I don’t think Brazil and Argentina, I don’t think Zimbabwe; I think DRC [Democratic Republic of Congo], Lebanon and other states where the basic social contract has collapsed; where the government is no longer able to maintain law and order in all places at all times; where society is utterly fragmented along racial, class, political and geographic fault lines ... and where communities self-organise to obtain a modicum of services and stability,” he says.
Forget about the proverbial frog in the boiling water that’s been getting progressively hotter. The frog’s fried and the water’s evaporated
— Deon van Zyl
“I think anarchy: a society with a formal government, but one devoid of capacity and legitimacy. I think of the appalling state of the country’s largest municipalities and of the extraordinary selfishness and blindness of the political class, and I imagine a country where this level of dysfunctionality has become the rule.”
Is there a silver lining?
“Only if the political parties realise that they are playing with fire,” he says. “So far, they haven’t. Perhaps a complete blackout or a debt crisis might trigger something. Perhaps not.”
Still, as convincing as this narrative might sound, De Baissac isn’t a fortune teller, nor does he have a monopoly on economic analysis.
Just another developing country
Old Mutual Wealth investment strategist Izak Odendaal finds the terms “endgame” or “failed state” unhelpful because they assume the future is binary — that a country will either flourish or collapse.
“South Africa’s reality has always been messy,” he says, “and will continue to be.”
He believes there is enough resistance to prevent the country from entering a death spiral, and that a sovereign debt default is unlikely. But he does warn that several “tough and nail-biting” years lie ahead.
“South Africa will get on top of some of its challenges, but others will remain,” he says. “I think our future looks much like the past — muddling along.”
So, does this mean South Africa will avoid a catastrophic blow-up but continue to grind lower until it ends up looking just like any other poor developing-country backwater?
“Yes,” says Odendaal. “Our peer group is Mexico, Brazil, Argentina, Botswana, Turkey, India, Indonesia, Thailand, Egypt and so on. On some metrics we score better than these countries. On some metrics we score worse. On balance we don’t stand out as more or less problematic.
“I don’t know if any of these countries call themselves ‘a failed state’ but it doesn’t matter. Life goes on and there are almost 2-billion people in this group who need to eat, work, sleep and play every day — and occasionally pay bribes to facilitate these things.”
It’s a relatively sanguine view — but it belies the fact that South Africa has been mired in a crisis of low investment and slow growth for more than a decade. Its growth drivers and fiscal buffers are utterly depleted. The upshot is that South Africa faces a confluence of economic vulnerability, fiscal fragility and political uncertainty.
Fiscally, the country remains unsustainable for two main reasons. First, the ratio of debt to GDP has risen inexorably since 2009; public debt is at about R5-trillion today. Second, interest rates on public debt exceed the growth rate of the economy. This means the burden of debt grows faster than the country’s capacity to service it.
For this reason, the International Monetary Fund in 2021 listed South Africa as one of five global outliers — with Iceland, Brazil, Mexico and Oman — that would likely face fiscal distress in the years ahead.
To head that off, the country will need to run primary budget surpluses and/or cut noninterest expenditure and/or impose tax increases. To its credit, the National Treasury is attempting to take these steps — but its efforts are invariably subverted by political decisions to raise wages, extend social grants and bail out failing state-owned enterprises (SOEs).
So, nearly every year, the goal of debt stabilisation gets pushed out. And yet it is hard to find a local economist who thinks the country is ripe for a debt crisis.
The rough consensus is that slightly better growth in the medium term, combined with a fiscally conservative Treasury, a credible Reserve Bank, deep local capital markets and the fact that 88% of government debt is denominated in rand, will keep a debt crisis at bay for many years. After all, sovereign defaults on local-currency debt are extremely rare.
The problem is that most economists aren’t factoring in new tail risks, such as the possibility of an ANC/EFF coalition taking South Africa on a populist wild ride after the 2024 elections.
South Africa will get on top of some of its challenges, but others will remain. I think our future looks much like the past — muddling along
— Izak Odendaal
“Add these risks into the mix and it is quite possible to craft scary downside scenarios that dramatically increase the probability of a debt crisis occurring in the next five years,” says Intellidex MD Peter Attard Montalto.
His base case is that South Africa will avoid the worst, but that growth will remain weak, averaging just 1.7% over the longer term.
“I don’t think that South Africa will get on top of all its challenges as there are simply too many,” he adds. “But it could get on top of just enough challenges to keep the rickety car on the road — though barely and with huge downside risks.”
At the opposite extreme is Old Mutual chief economist Johann Els. He believes the “emerging positives” — especially the trend towards “privatisation by stealth” in energy and logistics — are gaining ground and will allow South Africa to sustain average growth of about 2.5% over the medium term.
His view of the future is “a gradually improving growth environment, reduced fiscal risk, a place where foreign investors are happy to invest, a place which attracts lots of foreign tourists. Absolutely a country to live and grow in.”
*An independent judiciary and robust investigative press
*An entrenched democratic culture, with outspoken civil society organisations
*Strong institutions (the Reserve Bank, the National Treasury, the South African Revenue Service) that support conservative, orthodox macropolicies
*A population with broadly moderate/conservative values
*Highly developed infrastructure (despite its degradation)
*An agile business sector, quick to contribute skills and capital as the state retreats
*Energy liberalisation that has ignited a renewables fixed-investment boom
*A large minerals endowment and developed mining sector
*A strong capital base and developed finance sector
*A diversified economy with strong trade linkages
— SA’s indispensable strengths:
Frontline delivery failure
A more nuanced view is presented by Endres, who believes South Africa is in the throes of a profound transition. The “detrimental” state is becoming “emasculated” as citizens increasingly bypass it to solve their own problems — like fixing potholes and going off the grid.
Though Endres sees the transition as a positive step towards achieving a more effective, leaner government over time, he acknowledges that it is generating enormous anxiety.
The upside is that South Africa will be forced to undergo a process of decentralisation, with private players stepping up to change the country for the better.
A good example is the Kayamandi Fibre Project in the Western Cape. Fibre company Isizwe and its internet service provider PayGoZo are aiming to prove that uncapped, high-speed internet can be profitably provided to shack dwellers for as little as R5 a day.
Isizwe has installed fibreoptic cable to 5,000 homes in the Kayamandi informal settlement outside Stellenbosch, and aims to reach the other 10,000 by September. Crucially, the fibre network operator has made its software and systems open to all to encourage similar schemes. So far, about 10 other operators have taken it up.
Endres says an example like this should generate optimism about the future, though South Africa will likely go through three to five years of “turmoil and underperformance” before things improve.
But he concedes there are plenty of flaws in this scenario. The most obvious concerns the gaps left between the receding state and the private initiatives taking up the slack. Clearly, those unable to develop or benefit from private solutions, as well as those dependent on state services, will find their lives becoming more difficult and their prospects darkening.
This is a nightmarish prospect given that 50% of households already live in poverty. It means millions of poor, desperate people — indeed, whole provinces — could be left behind and will need to be placated by ever-increasing social grants. That would quickly become fiscally unsustainable.
The state would be reduced to a tax-and-transfer agency, and society would rest on the knife-edge of revolution as inequality deepened — if it isn’t already on the brink.
The only durable solution is a sustained acceleration in economic growth. However, given the political cycle, this is not remotely on the cards.
Many analysts think the most likely 2024 election outcome is that the ANC will poll below 50% but above 40%, allowing it to retain its governing majority in an alliance with a number of smaller opposition parties but avoiding coalitions with the DA and EFF.
But that’s unlikely to solve the central problem. As De Baissac points out: “How can we still expect the apparatus of the state to be the engine of a turnaround when it is that very apparatus that has led the collapse in governance, infrastructure and economic activity?”
Economists agree that urgent structural reforms are needed. The government has always relied on public investment to drive growth, but fiscal constraints and the incapacity of SOEs have closed this route, leaving an acceleration of private sector demand and investment as the only alternative.
Survival instinct — the ANC must curb load-shedding or lose its majority — is forcing the party to accept this. Hence the liberalisation of the energy market and efforts to pummel Transnet into granting private rail concessions. But progress is way too tentative to boost long-term growth prospects much above 2%.
*Intensifying load-shedding and the risk of grid collapse
*Extremely high and rising unemployment
*Weak state-owned enterprises
*Greylisting by the Financial Action Task Force
*Lack of infrastructure investment
*Endemic crime and corruption
*Receding state authority and credibility
— SA’s mounting weaknesses
And, as long as economic growth remains low, unemployment will remain high and the tax base will stagnate. In this environment, the state will battle to sustain the social grant system and social spending that keep society intact — let alone meet the expectations it has raised for a universal basic income grant (BIG).
Taxes could be raised to generate more revenue, but the significant hikes required to sustain a meaningful BIG would likely depress growth further, worsening South Africa’s fiscal fragility.
De Baissac can’t see how the country will escape a debt crisis in the next few years. As growth continues to falter, he expects the government to maintain high levels of expenditure. After all, it has no political room for manoeuvre between an inflated public sector wage bill, its growing welfare expenses bill and a rising debt-servicing bill.
And yet the end result need not be a typical sovereign debt crisis. Odendaal suggests South Africa may be courting a fiscal crisis that is going to materialise not in financial markets, but in frontline delivery. The ballooning interest bill and need to contain debt will constrain spending, he says, and reflect in the failure of state hospitals, of schools, of policing.
South Africa is already some way down this road.
Faced with this reality, many South Africans are wrestling with the decision of whether to emigrate to secure their children’s futures or to roll up their sleeves and get stuck in to save their local communities.
If the politics is a problem, vote and change the government. If the public sector is not delivering services, get involved ... We all need to be part of the solution
— Isaah Mhlanga
For Rand Merchant Bank economist Isaah Mhlanga, the solution lies in active citizenship.
“If the politics is a problem, vote and change the government,” he says. “If the public sector is not delivering services, get involved and consider working in it. If one is in business and there are binding constraints, be vocal and demand from the government that the constraints be removed — and pay your taxes ... We all need to be part of the solution and not remain on the sidelines while the country deteriorates.”
As noble as this sentiment is, no amount of social engagement can solve South Africa’s complex systemic crises. If it could, we would have fixed our education system by now, given the multitude of projects and millions of rand the private sector spends trying to do so each year.
This is a country where so many people depend on state services that there really is no substitute for state-led systemic change. Sadly, it is also a country running out of hope that this will ever occur.
South Africa’s doomsday clock is at one minute to midnight. Tick ... tock.
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