Assessing South Africa's Post-Election Economic Outlook

(EMMANUEL CROSET/AFP via Getty Images)

The skyline of Johannesburg, South Africa, is seen on April 19, 2023.

Faced with very low economic growth and increasing government debt, the next South African government will face significant challenges, especially as the ruling African National Congress (ANC) party will emerge politically weakened from the May 29 general election. However, a financial crisis remains unlikely in the short term thanks to important risk-mitigating features characterizing the country's economy. In recent years, South Africa's economic performance has deteriorated significantly relative to its own past growth and the growth of regional peers. As a consequence, socioeconomic indicators like employment rates, crime rates and access to education have worsened. The government has remained largely unable to combat this socioeconomic decline via fiscal stimulus due to rising government debt, which puts downward pressure on sovereign credit quality. Although the government has increased social spending to address socioeconomic demands, this spending adds to the country's debt load, which further precludes the government's ability to use longer-term strategies. Meanwhile, a lack of investment and deteriorating infrastructure have added to economic woes, including by causing disruptive power shortages, which have added to socio-economic dissatisfaction and weighed on the economic growth outlook. Amid these challenges, South Africa's income inequality is among the highest in the world.

South Africa's unemployment rate has increased from 25% in the 2010s to 34% in 2024. Youth unemployment currently exceeds 50%.
South Africa also continues to suffer high crime rates, as it has the third-highest murder rate in the world with 42 intentional homicides per 100,000 people.
Meanwhile, corruption is high and has increased, with German anti-corruption nongovernmental organization Transparency International ranking South Africa 83 out of around 180 countries in terms of corruption. (The higher the rank, the worse the corruption.)
Additionally, South Africa is one of the world's most unequal countries, with a Gini coefficient, which indicates income inequality, of 0.63. This coefficient is significantly higher than the average of those seen in other emerging economies. A Gini coefficient of 1 expresses maximum inequality.
All three major international credit rating agencies (S&P Global, Moody's and Fitch Ratings) assign a long-term foreign-currency rating of BB or BB- (or its equivalent) to South Africa's sovereign credit quality.

South Africa's new government will be unable to solve the country's structural economic challenges due to economic and political constraints. With an economic growth rate of only 1%-2% and effectively stagnant growth per income, growth-enhancing economic reform is more important than ever. However, South Africa's current political situation precludes large-scale structural reform and economic adjustment due to the ANC's declining popularity, clientelism and corruption. Moreover, in the short term, the government has insufficient financial resources to meaningfully tackle South Africa's economic and socioeconomic challenges due to high government debt and a large underlying fiscal deficit. South Africa also faces significant contingent liabilities in the form of bailouts of state-owned enterprises operating in the critical infrastructure sector, which will further add to the government's debt burden. Meanwhile, relatively high inflation will continue to erode real incomes, particularly of poorer socioeconomic groups due to their inability to hedge against it without government support. This will further erode the government's willingness to pursue a forceful fiscal adjustment or costly reform. Overall, this means South Africa is stuck in a low-level economic equilibrium absent economic reforms aimed at reversing declining productivity growth and low, falling investment.

The International Monetary Fund projects medium-term real GDP growth of 1.4%, a very low level by emerging standards and insufficient to address a growing population's socioeconomic problems. By comparison, real GDP growth in sub-Saharan Africa is projected to average 4%-5% in the next few years. South Africa's economic growth barely keeps up with population growth, which will translate into stagnating per capita incomes.
Low growth will also put significant pressure on South Africa's fiscal account, constraining the government's ability to support investment or significantly increase social expenditure to address failing infrastructure and socioeconomic grievances. Government debt has increased from around 50% of GDP in 2018 to more than 70% in 2023 and will reach 85% of GDP by 2028. This projection does not take into account additional contingent liabilities, such as the government's bailout of state-owned power utility Eskom, which cost the government 3% of GDP.
Energy production and weakening infrastructure will also continue to fuel public discontent and weigh on economic growth. While South African President Cyril Ramaphosa's 2022 removal of limits on the amount of power independent power producers can generate has reduced the duration of rolling blackouts, these are likely to persist for the foreseeable future amid continued vandalism against energy infrastructure.

Despite the country's low growth and deteriorating fundamentals, important risk-mitigating features — such as South Africa's floating exchange rate, favorable debt structure and independent central bank — make a major financial crisis unlikely in the near term. First, even though government debt is high and increasing, external debt and foreign-currency-denominated debt as a share of total debt are low. This limits South Africa's vulnerability to exchange rate shocks or an unwillingness among foreign investors to buy or hold South African government debt. Second, while government debt is high, its long maturity limits liquidity risks, not least because much of the debt is held by domestic banks and investment companies. Third, South Africa's floating exchange rate and limited foreign currency mismatches enable its economy to absorb a precipitous decline in capital inflows without sustaining broader financial damage, as a weaker exchange rate then boosts export and foreign currency revenues. Fourth, the country's relatively independent central bank helps maintain investor confidence, fiscal challenges notwithstanding. And fifth, thanks to the floating exchange rate, South Africa's current account deficits are generally manageable, limiting the build-up of foreign debt. Together, these factors mean that, despite the country's downbeat economic outlook and gradually deteriorating economic fundamentals, South Africa remains unlikely to experience a major financial crisis in the near term.

The structure of government debt remains solid due to local currency denomination and the ability to issue long-term debt. However, with government debt projected to increase in the medium term, credit quality will deteriorate and the risk of financial distress will increase, if only gradually.
South Africa has had a floating exchange rate regime for many decades, enabling it to absorb balance-of-payments shocks through currency depreciation rather than the sale of foreign exchange reserves.
South Africa's bank system remains well-capitalized, well-managed and has solid liquidity. Larger, systemically important banks are financially stronger than smaller banks. However, banks' holdings of government debt have increased, which in turn has increased the banking sector's vulnerability in case of severe sovereign distress.
The central bank has committed to targeting 3-6% inflation, which has translated into relative policy credibility. Thanks to the bank's independence, inflation should remain under control and fall toward that target range, barring a major exchange rate shock.

The ANC will likely lose its legislative majority in the upcoming general election, which will further complicate passing the structural reforms and macroeconomic adjustments needed to preserve medium-to-long-term economic and financial stability. According to opinion polls, the ANC will fail to win a majority of seats in the National Assembly in South Africa's May 29 general election. Depending on the scale of its likely electoral setback, this will force the ANC to either govern as a minority government or form a coalition with smaller parties, with the latter scenario being more likely. If the ANC decides to partner with centrist and fiscally conservative parties, such as the Inkatha Freedom Party, it would heighten pressure on President Ramaphosa to expand the role of the private sector in the power and transportation sectors, which might help revive market forces and economic growth. But such a privatization push would likely be constrained by the president's need to maintain the ANC's unity and avoid an internal rebellion from the party's populist Radical Economic Transformation (RET) faction. If, by contrast, the ANC decides to form a coalition with the left-wing Economic Freedom Fighters (EFF), it would reduce the likelihood of economic reforms even more, as the EFF would resist plans for further market-friendly measures and instead call for the advancement of Black Economic Empowerment policies (which aim to broaden the participation of black South Africans in the economy). The EFF would also push for the expansion of state intervention in the economy, as well as for land expropriation without compensation of White landowners. Such pressure from its governing partner would make it harder for the ANC to pursue politically costly, forward-looking economic reforms. For the ANC, a more fragmented parliamentary base would also make painful economic reforms more difficult to implement, absent a major financial crisis. Regardless of its next configuration following the May 29 election, the South African government would likely do what it takes to restore stability should financial conditions deteriorate significantly (namely, by adjusting its macroeconomic policy stance). But Pretoria would still be unlikely to tackle the underlying structural factors that are impeding economic growth and increasing government debt, such as the country's failing infrastructure, insufficient investment and rising levels of corruption. This is because addressing these structural challenges would require politically very costly reforms and would thus encounter strong socio-economic opposition, including from South Africa's powerful labor unions.

Polls suggest that the ANC will lose seats and may lose its parliamentary majority altogether in the May 29 election. The ANC has continuously controlled both houses of parliament since the end of apartheid in the early 1990s. But in recent years, the party's approval rating has continued to fall, dropping from 55-60% in 2019 to less than 40% most recently.
The upcoming election is expected to yield a weakened ANC or ANC-led government. Neither of these outcomes would be conducive to a strategic policy of economic reform, which South Africa needs to escape from its low-growth trap. While a new ANC-led government is unlikely to adopt outright populist, destabilizing policies, its likely failure to address structural and macroeconomic challenges points toward the continued erosion of economic fundamentals and worsening of socio-economic conditions in the next few years, even if the risk of severe financial distress will remain manageable.