The Bureau for Economic Research (BER) at Stellenbosch University yesterday outlined a “Sudden Start” scenario, which could boost economic growth.
Economist Shannon Bold, talking at BER’s conference in Sandton, said the scenario modelled an abrupt and significant increase in capital inflows due to a positive shift in market sentiment, which leads to investors re-rating South African debt.
This has happened to a certain extent already as the yield on the 10-year government bond has strengthened from 11.185% on April 25 to 9.46% on July 23 as investors have viewed the formation of the Government of National Unity (GNU) positively as they expect opposition parties’ involvement to accelerate economic reforms, address governance issues, and boost investment and employment.
The model assumes net capital flows ranging between 1% and 2.5% of gross domestic product (GDP), compared with a baseline of around 0.5% of GDP. This sudden influx of foreign capital leads to a further appreciation of the rand, reducing the cost of imported goods, while it should boost equity returns on the JSE. This in turn leads to higher household wealth, which boosts demand for consumer goods and encourages job creation in manufacturing.
The lower yield on government debt and stronger rand benefits the Treasury via lower interest payments on foreign debt.
The improved business sentiment results in energy-related projects being frontloaded, which reduces electricity price increases relative to the baseline. Other non-energy-related investments also resume, but the associated increase in imports may limit the boost to GDP growth.
The stronger rand and better administrative price dynamics contribute to a lower consumer inflation picture, which allows the South African Reserve Bank (SARB) to cut the repo rate by an additional 100 basis points compared with the 125 basis points expected in the baseline, so the repo rate drops to 6.5% at the end of the forecast period.
Duncan Pieterse, the director general at the National Treasury, said the government was aiming to create better macro-fiscal outcomes by providing a clear and stable macro-economic framework that supports growth; implementing reforms that increases the competitiveness of the economy; and prioritising investment in infrastructure through improvements in the infrastructure pipeline, the execution of that pipeline and the financing thereof.
“We believe that if we continue to focus on these areas, over time we will create an environment that encourages businesses to invest and employ more people – thus amplifying the impact of public policy and creating the resources required to deliver on our social objectives,” he said.
David Fowkes, the adviser to the governors of the SARB, said the end of load shedding in March 2024 meant that the estimated loss due to load shedding has been reduced from 1.5% of GDP last year to only 0.2% this year. The good news was that the date at which the headline inflation forecast stayed at or below 4.5% had been shifted to the fourth quarter 2024 at the time of the July Monetary Policy Committee (MPC) meeting from the fourth quarter 2025 at the time of the March MPC meeting.
This improvement in the inflation forecast meant that two members of the MPC voted for a cut at the July MPC meeting, which were the first votes for cuts since January 2021.
Busisiwe Mavuso, the CEO of Business Leadership South Africa (BLSA), said the industrial scale looting during the state capture years had hollowed out capacity in state institutions as people were appointed on the basis of loyalty rather than competence. BLSA was ready to engage with the GNU and looking forward to the first meeting on August 13.
BUSINESS REPORT