OPINION | Positive signs of steady economic growth under GNU

Since the formation of the government of national unity (GNU), South African asset prices have rallied strongly, signalling a potential shift in SA’s economic landscape.

It may be too early to definitively say the growth trajectory will improve durably towards the 2.5% -3.0% “break even” growth rate that will lower the debt-to-GDP ratio and the unemployment rate, but there’s room for cyclical optimism and a partial re-rating in valuations.

The GNU only recently “celebrated” its first 100 days in office. The major challenge to the GNU’s durability is that the ANC and DA are not “ideological bedfellows”, as Barney Mthombothi recently put it in his Sunday Times column. The contentious policy areas are education and the National Health Insurance.

Outside these populist policy areas, the ANC and the DA are arguably more aligned than the headlines would have us believe. The constraint on the ANC is that it is not allowed to shift its narrative on revolutionary development, opting to use public-private partnerships (PPP), rather than outright privatisation to expand much-needed infrastructure.

Even so, if done effectively, PPPs will be able to move the needle on capex and potential growth in the medium to longer term. A positive of the GNU is that it is fully aligned with the objectives of Operation Vulindlela, which is now entering phase 2.

We think it is unlikely the SA Reserve Bank will lose its independence, and we expect an ongoing focus on fiscal consolidation, even if gradual.

After politically-induced uncertainty ahead of the 2024 elections, business and consumer confidence has risen gradually. This reflects not only the better political outcome but also the lack of load-shedding. Perversely, the improvement in energy provision has dampened fixed investment as the need for embedded generation has declined.

That said, ongoing large electricity tariff increases will create renewed demand in a bid to manage energy costs. An expansion in grid capacity, at an estimated cost of about R400bn, is needed to further improve economic growth from the electricity side.

The woes in the rail and port sector have had a less direct impact on confidence, given that it is not as obviously felt as the lack of electricity.

Combined, the resolution to logistical constraints should probably lift growth by about 1%. Multi-year infrastructure expansion is set to lift fixed investment growth to 4%-6% over the medium term, and GDP growth to 2%-3%.

The expected improvement in GDP growth and investment rates have positive spillovers to how the market sees the credit rating and foreign capital inflows evolve.

This contributed to the sharp decline in SA’s bond yields and the appreciation of the rand. A fundamental fair-value model for the rand exchange rate shows that the valuation range for the dollar/rand exchange rate has fallen. We would not be surprised by an overshoot towards R16-R16.50 should the dollar continue to weaken as the Fed cuts rates. A sustained improvement at R16 would require a meaningful decline budget deficit and the debt ratio.

A sustained stronger rand would enable the Reserve Bank to maintain the inflation rate at or below the 4.5% effective target, which would feed back into lower interest rates and inflation volatility. Lower macroeconomic volatility enables a more stable business environment. A key requirement would be the addition of political and socio-economic stability, where the latter would benefit from low and stable inflation.

From a cyclical perspective, sharp disinflationary pressures in the short term should give way to rising inflation (albeit still aligned with the 3%-6% inflation target) in the medium term. This will be driven by improving domestic demand, a potential recovery in the housing market, and higher global commodity prices.

• Nel is head of multi-asset at Terebinth Capital.