/ 9 April 2024

Invest in megaprojects and economic diversification to overcome economic gloom

Growth Economy South Africa
South Africa’s economy remains under pressure with the country’s GDP forecast for 2024 set at 1% and 1.4% from 2024 to 2026.

South Africa’s economy remains under pressure with the country’s GDP forecast for 2024 set at 1% and 1.4% from 2024 to 2026. This is significantly lower than the World Bank’s target of 4% for emerging and developing economies. 

Below average GDP growth suggests the country will experience the same or worse in terms of unemployment over the next three years. The country’s youth are already disgruntled because of limited employment career prospects. Households are struggling financially because of rising inflation (5.1% year-on-year). 

Given the gloomy short- and medium-term outlook, substantial reform is required to enable steps to be taken to turn the economy around. Most importantly, the building of an inclusive and diversified economy will be critical for better outcomes over the longer-term. 

In terms of priority, the energy and logistics supply constraints must be addressed. Because of increasing public debt, the government cannot commit substantial resources to plug these gaps. But policy can be reformed to enable the private sector to do more. A first step was the increase in the threshold of self-generation of electricity which is expected to increase by 11 gigawatts over the short term. However, more needs to be done as is evidenced by the contraction of the country’s manufacturing, mining, and construction sectors in Q3 2023, with energy shortages being cited as a major contributor to these sector’s contraction. 

Facilitating public, private partnerships for larger scale projects that significantly reduce the energy supply-demand gap will be critical to address the shortfall in the short- to medium-term. This is already happening but such processes should be expedited to ensure there is enough energy for economic growth and diversification. 

Other sources of energy should be explored such as municipalities generating their own electricity through waste-to-energy initiatives involving twinning support arrangements with countries such as Malaysia, which has reduced landfill waste (a growing problem in Gauteng and the Western Cape) by converting waste into electricity. 

In terms of logistics, upgrades of port, road and rail infrastructure should be prioritised to facilitate increased export trade. In addition to trade agreements that South Africa has with Asia (particularly China, India, and Japan), Europe and the United Kingdom, North America (particularly the US) and Latin America and the Caribbean (particularly Brazil), the country should also leverage the African Continental Free Trade Area agreement to increase continental exports. 

Trade that contracted in Q3 2023, caused mostly by port delays and rail infrastructure shortages, can be turned around through public and private sector investments to facilitate further export trade growth. Examples of sectors that will benefit from better logistics infrastructure include agriculture, where the citrus sub-industry exported 500 000 fewer tonnes of fruit in 2023 because of delays at the Cape Town port. The agriculture sector also resorted to exporting some of its produce through Gqeberha, which again creates inefficiencies that could have been avoided if adequate infrastructure existed. 

Investing in diversifying the economy will bring better outcomes in the longer-term. Initial evaluations need to explore local industries and the potential for them to be further developed. South Africa’s economic diversification index stood at 108.1 in 2021, which is more than 30 points lower than the world’s most diversified economies (the US at 149.9, China at 144.0 and Germany at 136.8). 

South Africa should invest more in growing its economy beyond its resources and services sectors. Initially, diversification must be considered in terms of ease of expansion (downstream integration), aligned to domestic needs and wants (domestic population must be a key baseline customer base), and leverage available skills and resources. 

Economic diversification can also be considered from an import substitution perspective. Evaluations should be carried out of the country’s top-50 imports over the last five to 10 years and from this identify commodities that can be produced locally (based on available resources including human capital) and attract investment for the production of these goods locally. From a sustainability standpoint, the selected goods should also be consumed extensively by large procurement customers such as the government. 

In addition, the locally produced goods should have significant regional export potential, including to the Southern African Development Community and sub-Saharan Africa.

A final consideration for longer-term GDP growth is greater adoption of technology and innovation across all economic sectors. Ensuring that the economy is run more efficiently and effectively through the use of relevant technologies reduces leakage and contributes to resources being used more effectively. 

Integration of technology also supports domestic human capital development and further economic diversification through businesses developed around the newly adopted technologies. Integration of artificial intelligence (AI) across sectors such as healthcare, education, agriculture, financial services, retail, transport and logistics and entertainment is still in its infancy but offers significant potential. Based on recent announcements, local (Standard Bank) and global (Amazon Web Service) companies are committing larger budgets to incorporate and leverage AI to better serve their customers. Other relevant South African sectors should invest in progressing the AI industry to take full advantage of these opportunities. 

James Maposa is the managing director at Birguid.