SA’s rising private sector participation, improving economic fundamentals

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SIMON BROWN: I’m chatting with Johann Els, chief economist at PSG Financial Services. Johann, a number of years ago – I can’t remember how many, I’m pretty sure it was pre-pandemic – you wrote an article at the time around radical economic transformation.

It was not political sloganeering, but more around real shifts that we were seeing – private sector participation with government, structural reforms, things like Transnet, like Eskom. Frankly, some of it has really happened, a lot of it is on track. We really are seeing some big shifts happening slowly, but happening in our broader economy.

JOHANN ELS: Absolutely. And it is radical in the sense that 10 years ago we didn’t think this was going to happen. We were struggling and we had severe depression around politics and policy and the lack of economic growth.

Now we’re seeing that transformation in terms of government actually allowing this far bigger role of the private sector in the economy. And I think, again, it’s radical because nobody expected this, nobody thought that government would allow this.

So where government was running state-owned enterprises, government departments, et cetera, which we knew were failing and couldn’t cope in terms of getting the stuff we needed – electricity and logistics, et cetera – now we are allowing the private sector to do that. And I think that’s the saviour of the SA economy.

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SIMON BROWN: it’s been a long road, it’s been a slow grind. But in the recent article you wrote, you talk around economies changing at the margin. And that’s so fundamentally true. You have kind of fixed Eskom and that’s a big thing, but its ripple effect is so much bigger. It ripples into Transnet. It’s the little changes at the edges, I suppose, that magnify over time and really have the implication. And we’re seeing it. Eskom is one, but others are coming.

JOHANN ELS: Absolutely. Remember in the first quarter of 2024 we still had Stage 6 load shedding every single day. And now we are happily moving on, and we forget those depressing days.

As you say, on the margin everything starts to happen and it takes a while before we actually see it in GDP growth numbers. We haven’t yet.

But gradually, if we can run the economy better, more productively and cheaper because better infrastructure and better services and those things make it cheaper to run the economy, all of that is beneficial going forward. But it happens slowly initially. And then eventually we wake up one day and see hang on, stuff is happening around us.

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SIMON BROWN: Like the fact that two years on load shedding is, touch wood, a distant reality.

The other big part of this perhaps has been a fundamental change within government, because it’s the growing role of the private sector. We’re going to have private rail locomotives on Transnet track, which was probably unheard of just three or four years ago, never mind a decade ago.

JOHANN ELS: Absolutely. I think when the licences were awarded, we still were sceptical. And then suddenly we saw the reports that, hang on, this stuff is being imported through Durban harbour. The locomotives and the wagons, et cetera, are coming in. And so it’s happening.

I suspect a big part of this scepticism is that after 16 years of virtually no economic growth we’ve become disillusioned, totally. We thought these policy changes – we hear them, but they’re not really going to make a difference, it’s happening too slowly. All those kinds of issues. And suddenly it’s happening.

Suddenly we open our eyes and things are busy happening around us. That’s where Operation Vulindlela and Treasury have done a lot in terms of easing those processes, the regulations allowing the private sector this bigger role, the potential to participate.

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SIMON BROWN: And then it ripples through all over the place. We sit in a primary budget surplus, we’re expecting debt close to peaking, we’re seeing foreigners buying our bonds. Those are again maybe indirect, but they’re part of the process, part of the outcome of this process of improving infrastructure.

JOHANN ELS: Absolutely. For years we’ve struggled on the fiscal side. Suddenly now, as you say, we’re running a primary surplus. And suddenly investors locally and internationally and ratings agencies are believing that we now can see that debt ratio peaking. And suddenly we saw some rating upgrades – and we can expect more, I expect.

SIMON BROWN: The key point is you’re right; we’ve had the ratings upgrades; we’re off the grey list. And if we go back to February this year, we were expecting some GDP growth to start happening.

We’ve been stuck at 1% forever and a day. We of course now have, what, –2% for Q2. My sense though, that’s not us shooting ourselves in the foot as much as it is the broader global picture and perhaps most notably the fuel price, which is hurting and going to continue to hurt and is something about which we as a country cannot do much.

JOHANN ELS: Absolutely. We have to admit we are a small, very open economy. So all those happenings in the rest of the world do impact on us, quite severely sometimes. But if we just take the rand exchange rate as a barometer, it has behaved far better this time around with this global crisis – the war in the Middle East – than at previous times of crises like this.

For example, the Ukrainian war, which started in early 2022 – then the rand and inflation reacted far more negatively than they do now. That is part of the market saying, hang on, slowly but surely some of South Africa’s fundamentals are actually busy improving and seeing that improvement. And that’s the rand telling us that.

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SIMON BROWN: I’ve commented recently on the currency, and it’s not the rattlesnake we’re so used to.

To be clear, there’s still a lot that needs to happen, make no mistake – more reform, labour reforms, et cetera.

But there’s another angle that you mentioned, which is perhaps the much longer-term view – developed markets, ageing populations, emerging markets and South Africa being one of them.

We really do become attractive because of our bond market, our currency, our foreign equity flows. But of course there is our population, a young population, which is crucial for us because unemployment remains one of our key challenges.

JOHANN ELS: Absolutely. Younger populations in emerging markets, populations that are still moving into cities. That creates a much more productive effect in terms of making it cheaper to run an economy. Not only South Africa, but most of the other emerging markets are running better policies, fiscal and monetary policies.

So risks have reduced quite substantially compared to 20, 25 years ago. Suddenly emerging markets are high growth, but lower risk than developed economies. Developed economies – the USA for example – sit with a government debt-to-GDP ratio of more than 120%. South Africa’s is only at 79%.

So suddenly investors are worried about the US or other developed economies, and looking towards emerging markets which are still providing better growth, better earnings potential, but lower risk than we’ve been used to over the last 20 years.

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SIMON BROWN: Yes. As you said there, it has certainly occurred to me. The US 10-year [bond] is about 5%. Our 10-year is call it at 8.5%. I don’t know that the gap’s ever been that narrow – certainly not that I’ve noticed before.

We’ll leave it there. Johann Els, chief economist at PSG Financial Services, appreciate the time.

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