Month: May 2026

Export led growth would be a blessing

A path to faster growth in SA could be export led. There is no lack of global demands for valuable goods and services that could be delivered from SA with the right incentives to do so. The most obvious incentive would be a consistently favourable relationship between the revenues, realised producing goods and services at home for foreign customers and their costs of production. From an exporters perspective and from the perspective of a local producer competing with imports, the wider the gap between exchange rate movements and inflation rates, the better for growth in output and incomes with more exported less imported.

To encourage the demand for exports and discourage the supply of exports the exchange rate should weaken predictably by more than the difference between inflation in SA and its trading partners. The weaker the exchange rate movements compared to the differences in inflation rates, the better for competitive local production. But ideally the exchange would weaken at a modest rate, but also one that consistently exceeds a hopefully still modest rate of inflation. Indeed, a slow rate of currency depreciation is an essential ingredient for sustaining low rates of inflation. Yet still allowing enough of a predictable gap between exchange rate weakness and local inflation to make exports and replacing imports a consistent driver of faster growth.

The South African rand ever since the economy opened to significant inflows and outflows of capital in 1995 has consistently had much more purchasing power at home than abroad. As any tourist local or foreign would attest. SA is among the very cheapest destinations. The 50th cheapest Big Mac cheeseburgers are to be found in SA. We pay about USD 2.78 for the privilege. Compared to an average $5.79 paid in the US (tip 20% – strongly recommended, excluded)

You would only pay marginally fewer dollars and cents for your Big Mac in Egypt, India Indonesia and Taiwan than in SA. Surely a boost to incoming tourism. The most expensive Big Macs are to be found in Switzerland, priced at over 2.8 times their USD cost in SA. Switzerland struggles to maintain the competitiveness of its jewellery and watch manufactures and Alpine holidays in the face of safety seeking capital flows that raise the cost of a Swiss franc and everything else in Switzerland. Perhaps a high-level problem to have when you can convince the wealthy of the world that their money is safe with you. According to the WSJ the average price of a margin enhancing and buzz inducing cocktail in the US is now $13.61. Equivalent to R225 rand. Which with luck and judgment your local speakeasy will charge you half as much- maybe R110.

Fig.1; The Price of a Big Mac around the world. A multiple of its dollar price (2.78) in South Africa

Source; Google and Investec Wealth and Investment

But this ratio between the foreign exchange value of a rand and its purchasing power equivalent has been a highly variable one. Since 2000 the rate of inflation in SA has averaged about 2.4% a year faster than in the US, with minimal volatility.  The USD/ZAR exchange rate has weakened by an average 5.8% p.a. providing for a generally competitive exchange rate with the USD but a margin with very high volatility. Making the budget calculations of exporters and importers highly uncertain A highly variable real exchange rate is not good for sustainable business. We should hope for less volatility.

Fig.2; SA Vs US Inflation Differences,  and USD/ZAR Exchange Rate Movements % p.a. Calculated monthly.

Source; Bloomberg, Fred, Investec wealth and Investment

A purchasing power equivalent (PPP) exchange rate would fully compensate for differences in inflation rates between SA and the US. If the exchange rate (R3.6 in 1995) had simply compensated for difference in SA and US inflation since then, the USD would now trade for less than 9 rand – about 54% of its current market. Roughly equivalent to the double we pay in rands for the goods and services we consume abroad

Fig.3; The market and PPP equivalent USD/ZAR exchange rates

This ratio of the market value of the USD/ZAR to its PPP equivalent has however varied from a peak of 2.4 times in 2002, to a brief one-to-one relationship in 2010. A very good time to have travelled Whereafter under Zuma inspired threats to capital took the ration back over 2 in early 2016, a ratio that has remained similarly elevated and internationally competitive since.

Fig 4; The Real USD/ZAR exchange rate Market/PPP Ratios. (1995=1) Higher numbers indicate improved foreign competitiveness.

Source; Bloomberg, SA Reserve Bank and Investec Wealth & Investment

Yet despite the stimulus of a competitive exchange rate, export volumes and revenues in USD and have been largely stagnant since 2010. There was very strong growth in the years before. And imports have kept pace with exports. Clearly other well  recognised forces have restrained economic growth generally as well as limiting the capacity to export and compete with imports.

Fig 5; Exports and Imports;  USD values.

Source; SA Reserve Bank and Investec Wealth & Investment

But the case for export led growth remains compelling. It needs the right supply side encouragement. A more predictable exchange rate – both nominal and a competitive real exchange rate would be very helpful to the purpose. But very recent global events and its impact on the ZAR- a high beta emerging market exchange rate – have reminded us how unlikely is this prospect. And low inflation itself can be a mixed blessing for exporters if it means a stronger real exchange rate. South Africa should seriously consider the actions that would convince investors to support the economy with capital. And to learn to manage exchange rate instability and inflation without destabilising the real economy.

A luta continua. It does not have to be so difficult to grow faster

Since 2016 in ten years the annual growth in real GDP has averaged a miserable 0.69% p.a. and the growth in household disposable incomes has grown by an immiserating 0.46% p.a. average. By sharp contrast the increase in the wealth of South Africans has been very impressive. Net SA wealth held offshore was substantially negative before 2014, it amounted to over 2 trillion rand by 2024. The result of capital gains realised in portfolios rather than net inflows into AUM. Relieving forex controls has worked very well for SA balance sheets.

 Fig 1; SA;  Growth in Net Foreign Assets 96-2024. Annual Data

Source; SA Reserve Bank; Investec Wealth and Investment

Fig 2; SA Foreign Assets and Liabilities. Market Value (R million) Annual Data.

Source; SA Reserve Bank; Investec Wealth and Investment

The income received from assets held abroad still lags well behind the payments of dividends and interest to offshore investors. An income gap that has remained a very wide one and a major contributor to the deficit on the current account of the balance of payments. South African issuers of debt or equity pay out at a much higher rate than we receive. Currently the yield on SA securities held abroad is over 5% p.a. compared to the 2% yield received.[1]  Measured in rands that are expected to lose value over time.

Fig 3: Foreign receipts and income from SA assets and liabilities held offshore (R millions) Annual Data

Source; SA Reserve Bank; Investec Wealth and Investment

Fig.4 Foreign receipts and income from SA assets and liabilities held offshore. Yield per cent per annum. Annual Data

Source; SA Reserve Bank; Investec Wealth and Investment

Better perhaps to be a lender with a strong balance sheet rather than a borrower. Yet capital inflows from abroad used to fund capex would be very welcome. Both the savings and capex rate in SA are unsatisfactorily low and a symptom and a cause of slow income growth. Slow growth in incomes and in the demand for additional goods and services discourages scaling up production and capex to do so. Faster growth would stimulate capex improve returns on capital invested and attract the foreign capital to fund that growth. It is striking that the when the economy grew much faster in the mid 2000’s the ratio of capex to GDP rose to 22%- it is now 14%- and the widening gap between Capex and Domestic Savings was closed, as was the deficit of the current account and the deteriorating balance of trade of the balance of payments,  by larger net inflows of capital. Faster growth in spending widens the gap between exports and imports and the current account deficit (an unnecessary concern)  But will only prove possible when funded by inflows of capital. The capital makes possible the current account deficit. Current account deficits and capital inflows are most helpful when growth is accelerating.

Fig 5; The Ratio of Capex and Gross Domestic Savings to GDP. Annual Data (1996-2025)

Source; SA Reserve Bank and Investec Wealth and Investment

Fig 6; SA Balance of Payments Flows and Identities (96-2025) Annual data

Source; SA Reserve Bank and Investec Wealth and Investment

Faster growth must be accompanied by an increase in the demand for goods and services, imports add to the supply of goods and services. Demand= supply is the National Income Identity. Both sides matter.  And faster growth becomes possible without inflation should the exchange value of the ZAR hold up. The prospects of faster growth are very likely to encourage capital inflows to fund any widening of the current account deficit and help to stabilise inflation as it did in the boom years 2002-2007. Faster growth with less inflation is very possible should the global capital market approve of the improved growth prospects and supply the capital that supports the currency.

It is surely apparent that shocks to the USD/ZAR and other exchange rates lead inflation in both directions. As it will again after the oil price shock. And policy determined interest rates are likely (misguidedly) to rise to further inhibit the growth in spending already under pressure from higher prices. Unfortunately, the case for investing in SA has deteriorated, as has the outlook for inflation.

Faster growth over the past ten years has been an economic impossibility because the demand side of the economy has been so severely and consistently depressed by highly restrictive monetary policy. And faster growth- anything above 2% a year – will remain an impossibility, unless interest rate settings become more accommodating of higher levels of spending by households and firms accompanied by faster rates of growth in the money and credit supplies.

The growth in the real supply of bank credit since 2016 has averaged less than 0.5% p.a. and the money supply (M3) as grown at an average annual rate of 1.9% p.a.  Much too slow for comfort. Unless these key monetary growth rates are allowed to accelerate faster growth will not happen, indeed cannot happen. And inflation as before will depend mostly on the exchange value of the ZAR. Which will be decided in the Strait of Hormuz, not in Church Street, Tswana. Without lower interest rates the supply of money and credit will continue to grow as slowly as it has over the past ten years and frustrate any growth potential supply side reforms may make. An increase in supply requires an increase in demand.  

Fig.7: SA; The supply of money and bank credit- After inflation (2010=100)

Source; SA Reserve Bank; Investec Wealth and Investment

[1] The yield is calculated as Income as per the balance of payments accounts divided by the value of the assets or liabilities.