ZA Economist

29^th May 2025

Inflation in SA has declined sharply from a 5% plus rate in early 2024 to 2.8% p.a. (see below) If  current trends persist the rate of inflation will rise to about 3.5% by year end. We consider the reasons for the recent decline in inflation and the conditions that could give rise to persistently low inflation in SA, that is 3% p.a. or lower inflation sustained over an extended period.

South African Inflation (2016 – 2025) Monthly (Annual % change in CPI Index)

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

South Africa Inflation (2024-2025) Monthly (Annual % change in CPI Index)

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

The reason for this welcome relief from rising prices seems clear. The demand for goods and services has been growing very slowly, thanks to highly restrictive monetary policy. And the supply side of the economy given rand stability helped further recently by a degree of absolute ZAR strength has meant  moderate increases in the CPI. Weak demand and increased supplies- lower price imports – have meant modest pressure on prices.

The demand side

The growth in the money supply and bank credit, that influence spending in a direct way, has remained highly restrained for an extended period- going back to 2016. Money supply (bank deposits) have grown by an average 7% p.a. since 2016 and bank credit supplied (accounting for a large majority of the asset side of the bank balance sheets) has grown by an average 5.3% p.a. Inflation has averaged 5% p.a. over these years, implying real growth rates of the supply of money and credit, in line with the slow rates of growth of output(GDP) and national incomes.

Reactions by the Reserve Bank to the Covid lock downs led to a brief spurt in money supply growth in 2020-2021. Money and credit growth picked up again in 2022-23 as commodity and metal prices recovered but then as abruptly fell away. Both money and credit growth have declined consistently since then. Real bank lending to the private sector is below pre-Covid levels as is GDP.  The money supply- that is mostly bank deposits, is barely up (by a mere 4%) since 2020. Given such financial repression, any upward pressures on prices from extra spending – from the demand side of the price equation, were surely not possible. Furthermore, this lack of demand itself would have been inconsistent with real GDP or GDE growth of more than one per cent p.a. since 2023- as has been the case. Growth as well as prices respond to a mixture of supply side and demand side forces. When real demand grows very slowly as it has in South Africa, real income growth cannot advance at a much faster rate. Regardless of what may well have been faster potential growth. One can never know what might have been with less austere monetary policy settings.

The money supply and credit cycle 2016- 2025. Monthly data annual growth rates

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

Real Money Supply (M3) and in Bank Credit supplied to private sector. (2019=100)

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

Since early 2023 the growth in the money supply and bank credit- at current prices- has declined significantly as is shown below. The trends, especially when adjusted for (lower inflation) have continued to restrain spending.

Growth in Money Supply and Bank Credit 2023-2025. Monthly % p.a.

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

Monetary policy must also be judged as highly restrictive by observation of policy determined short term interest rates. When interest rates are adjusted for falling rates of inflation, to approximate the real cost to borrowers of raising credit it may be seen that real interest rates are at a post 2016 peak.  The Reserve Bank does not target money supply or credit growth rates. The instrument of policy is its interest rate settings. Policy determined short term interest rates were hiked sharply in response to higher inflation, post Covid. This represented a highly predictable SARB interest rate response to a supply side shock to prices. A shock linked to the Ukraine crisis, combined with a weaker rand. Borrowing costs are now lagging well behind the more recent decline in inflation sending real rates to very high demand suppressive levels. Clearly borrowing from the banks to fund working capital or a mortgage on a home loan has been strongly discouraged by the high real costs of or rewards for money and credit. And the demand for and supply of bank credit have accordingly grown at a very slow rate.

Significant relief for borrowers is not expected any time soon. The forward rates of interest on May 25^th indicate a mere 25 bp reduction in short rates over the next twelve months. Without significantly lower interest rates to encourage the growth in demand for bank credit and spending by households and firms, GDE will not grow beyond forecast GDP growth rates of less than 2% p.a. And too little rather than too much spending (relative to potential supplies of goods and services) will continue to weigh heavily on the pricing power of domestic producers.

That is without pressure on prices emanating from the supply side of the economy that could independently force prices higher- and demand still lower in response to supply side driven higher prices. Especially should higher interest rates follow supply side  shocks- as has so often been the  been the case in SA. The Reserve Bank has predictably increased interest rates, whatever the cause of higher prices, less supplied or more demanded. Though the pressure on prices has almost always come from the supply side – from exchange rate weakness.  shocks.  As was the case most recently in 2022. Ideally temporary supply shocks on the price level should be ignored by monetary policy.

Short term interest rates before and after inflation. 2016-2025.

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

The Supply side

The supply side of the SA economy is dominated by the exchange value of the ZAR and the impact it has on the prices of imported and exported goods. The SA economy is heavily dependent on imports and exports- equivalent together of about 60% of GDP – and usually well balanced. The cost of an average imported good or service, and the value of an export depends on global price trends- usually expressed in USD . Their translation into rand prices is via the exchange rate. With something of a lag – as prices adjust gradually to higher exchange rate related costs of supply- higher or lower depending turn on the hedging strategies adopted.  For an important influence of this kind, we can refer to the USD price of a barrel of oil that finds its way into petrol and diesel prices and the CPI will be a combination of world market prices in USD and the exchange value of the rand.

It should be recognised that the exchange value of the ZAR has remained unusually stable over recent years. As a result, the supply side of the economy, has generally benefitted from a degree of rand stability, helping to contain inflation about the 5% p.a. mark until the recent improvement. This degree of rand exchange rate stability came after the Zuma inspired, significant degree of rand weakness, of 2015, And absolute strength in the ZAR over the past year and a half has helped take the inflation rate to 3% p.a. Helpfully also the price of oil in USD and in ZAR has been in retreat for most of the period since 2022, having spiked between 2020 and 2022 in response to the invasion of Ukraine and the sanctions imposed on Russian oil. The prices of all imports to SA have stabilised and the inflation of imported goods was close to zero by year end 2024. Recently oil price trends in USD and ZAR have been very helpful in containing upward pressure on costs and prices.

The USD/ZAR exchange rate and annual movements in the USD/ZAR (y/y % p.a.)

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

The price of Brent Crude Oil USD per barrel (LHS) and ZAR per barrel (RHS)

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

Price Indexes SA CPI and Import Price Deflator (2019=100) and annual % changes in Indexes. Quarterly Data

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

Supply and demand working together

Inflation in SA has receded because of a combination of weak demand and an improving supply side – led by a more stable exchange rate and helpful oil prices. Inflation can stay at low levels if these supply and demand side forces are sustained.

Slow growth threatens fiscal sustainability. It raises the risk of a SA government resorting to creating money to fund government spending for want of revenue and under the pressure of a growing interest rate bill on a budget- that seriously constrains other more popular spending plans. Slow growth and the money supply responses that may accompany slow growth increases the expected rate of inflation over the long term.  These expectations lead in turn to higher long-term interest rates on government debt to compensate lenders for more inflation expected. So adding to the interest costs of servicing government debt and putting further strains on government budgets.

Slow growth may restrain incomes and spending and so, absent supply side forces lead, to lower rates of inflation. But slow growth threatens fiscal stability, it discourages domestic capex and capital inflows to fund them that might have improved longer term growth prospects.  Thus, weakening the exchange rate and despite weak demand putting upward pressure on prices. The relative strength of the ZAR has had very little to do with recent demand destroying interest rate settings and the consequently slow realised rates of growth since 2020 and indeed since 2016. It is almost all a supply side story – the prospect of somewhat improved growth prospects given the GNU.

The dependence of the outlook for economic growth on political developments in South Africa and therefore for the exchange value of the ZAR has been very clearly illustrated recently. More growth expected leads to a stronger rand as capital tends to flow more to than away from South Africa and vice versa, slower growth expected frightens capital away and tends to weaken the rand- and raise inflation rates.

The Government of National Unity (GNU) formed after the elections of May 2024 were regarded as more growth friendly. And the rand strengthened accordingly. Dounts that the GNU would survive the arguments over the 2025-26 Budget proposals led to rand weakness. The agreements on the Budget reached finally in May 2025 have reinforced the GNU and added too rand strength (see below) For the ZAR it is the supply side – the outlook for growth that matters most. The demand side and interest rate settings matter much less. And unaccommodating interest settings and slow growth in money and credit that slow down growth lead to rand weakness rather than rand support.

Political developments and the ZAR in 2024-2025. Daily Data. Lower numbers indicate rand strength.

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

A firmer rand responding to what the markets decided would be growth improving economic policy settings has meant less pressure on inflation. Combined with sustained negative pressure on the demand side of the economy the prospect of low rates of inflation over the long run becomes more likely with supply side reforms that raise potential growth rates.

Ideally the prospect of more growth and less inflation would be recognised early by the bond and currency markets. In the form of lower interest rates and a narrower risk spread between RSA and USA interest rates. That is in the form of a narrower carry and therefore a lower cost buying dollars for forward delivery.

SA Interest rates, their levels and differences with US rates have still to register any marked change in sentiment about the outlook for SA growth and inflation. Forward exchange rates still consistently expect the rand to weaken, compounding at about 5% p.a. Since 2016 the difference between one year SA and US government bonds has averaged 5.1% p.a. with very little deviation about this average. The actual market movement in the rand over one year averaged less over the past 15 years by 4.4% p.a. with very wide fluctuations about the average (see below) Currently the difference between one year SA and US Treasury yields has declined to less than 4%. The carry for five year and ten year money has remained above 5% p.a.

Inflation expected in South Africa is not only reflected in longer term interest rates. It is also revealed by differences between RSA rand rates of interest and USD interest rates for securities of the same duration. These differences in interest rates indicate the expected direction of the ZAR. The greater the difference, the more the ZAR is expected to weaken over time, by application of the interest parity condition. The difference in yields is equal to the difference between the spot and forward rates of exchange. Arbitrage maintains this equilibrium condition. 

This yield difference -the so-called carry- represents the cost of hedging the rand against the US dollar. The difference in yields may also be regarded as the reward for or the cost of expected exchange rate weakness or strength. What is gained on the interest rate spread is offset by (expected) ZAR exchange rate weakness. And vice versa for holders of USD receiving lower interest rate income but offset by a stronger dollar.

The wider the difference in interest rates the more expensive in ZAR will be dollars to be delivered in a year or more ‘s time. This cost of hedging will also find its way into the prices of imported goods and services. Rand weakness expected adds to inflationary pressures. To hope to sustain inflation at low rates, these interest rate differences must narrow to simultaneously reduce expected rand weakness and so ease the supply side pressures on prices especially the prices of goods or services imported.

The expected and realised move (% p.a) in the USD/ZAR over one year (Daily Data 2016-2025

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

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

Yet not only is the rand expected to depreciate at a compounding rate of close to 5% a year over the next five years and more, the rand, is also expected to weaken by more than the difference in inflation in SA and the US. As it has done in the past. The ZAR has weakened over the years at a significantly faster rate than past differences in inflation between SA and the US. It is expected to continue to do so at about 2% a year faster than the expected differences between SA and US inflation.

 We show the differences between actual inflation in the US and SA and the differences between expected inflation in the two economies. Expected inflation in SA over the next ten years is expected to average 6% p.a. Expected inflation over the same ten years is expected to average about 2.2% p.a. A difference of close to 4%. Yet a dollar delivered in ten years’ time would cost over 6% a year more p.a. (see below) Put differently the ZAR/USD exchange rate has not conformed to Purchasing Power Parity, it is expected to deviate still further away from PPP in the future. Inflation expected in the Bond market is calculated objectively as the difference in yields between a vanilla bond and an inflation protected bond of the same duration, the so-called breakeven rates.

SA and the USA Actual inflation and Expected Inflation 2016-2025

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

SA and USA Differences in Inflation and Inflation expected

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

There is much to be done to raise the growth in SA output and incomes. There is as much to be done to convince investors in and outside SA that faster growth and less inflation and less exchange rate weakness over the long run is to be expected. Setting a lower target for inflation will not be sufficient to the purpose. A stable ZAR will be essential.  Changing the long-term growth trajectory would be very helpful to the purpose of faster growth with less inflation to accompany a stronger ZAR. And as important for immediate improvement in the growth and inflation outcomes would be less inflation and exchange rate weakness expected.  

It would also be helpful that should the economy suffer from another shock to the ZAR for global or SA specific reasons, the Reserve Bank could refrain from raising interest rates. To let the price shock work its way through without incurring further damage to the growth prospects of the economy and the demand side of the economy, when already under pressure of higher prices, with higher interest rates. Judged by past performance the danger to the economy will be policy determined interest rates that are too high rather than too low for the good of the economy. It is to an improved supply side of the economy we should look for permanently low inflation. The danger of demand led inflation, given the prevailing Reserve Bank culture, is a small one.

June 3rd, 2025

Inflation in SA has declined sharply from a 5% plus rate in early 2024 to 2.8% p.a. in April 2025 – for the usual supply and demand reasons. The demand for goods and services has been growing very slowly, and the supply side of the economy, given rand stability, recently even absolute ZAR strength, has brought moderate increases in the CPI.

Bank lending to the private sector has been growing very slowly. Adjusted for prices, bank credit was still below pre-Covid levels and the real money supply after a spurt during Covid had grown by only 4.2% between 2021 and the first quarter of 2025. Recent growth rates in money and credit have trended lower. A financial state that can be described as severely repressive. Given the weakness of demand for goods and services it is unsurprising that real incomes and output (GDP) were but 3% higher in q1 2025 than they were in early 2019. When real demand grows as very slowly as it has in South Africa, real output could not have advanced at any faster rate than it has, meaning an expensive waste of a somewhat better growth opportunity.

Real Money Supply (M3) and in Bank Credit supplied to private sector. (2019=100) Monthly data to 2025 q1.

Growth in Money Supply and Bank Credit (January 2023-2025 April) Monthly % p.a.

The lack of demand for and supply of credit and money is explained by short term interest rates set by the Reserve Bank. As inflation has come down the real cost of borrowing for overdrafts or mortgages has risen to very high, near record levels. Despite two 25 bp, highly delayed, reductions in the policy determined rate. The money market now predicts but a mere 25 bp further reduction in short rates over the next twelve months.

Without significantly lower interest rates to encourage the demand for bank credit and spending by households and firms, frustratingly poor GDP growth rates of less than 2% p.a. should be expected. And the prospect of too little rather than too much spending (relative to potential supplies of goods and services) is likely to continue to weigh heavily on the pricing power of domestic producers. The demand side of the economy is very unlikely to threaten higher prices for the foreseeable future without an unlikely change of mind set at the Reserve Bank.

Short term interest rates before and after inflation. 2016-April 2025. Monthly Data

Yet the unpredictable supply side of the SA economy, perhaps accompanied by a sharp reduction in the exchange value of the ZAR could always drive prices higher. And judged by past performance the Reserve Bank would then then drive interest rates higher to further depress demand that would come under pressure from higher prices. Imports and Exports account for a combined 60% of GDP. Their translation into rand prices depends on the exchange rate. That recently has been strong against the USD, the Aussie dollar and the EM basket. The Import Price Index (with a large oil component) was falling in 2024.

Price Indexes; SA CPI and Import Price Deflator (2019=100) and annual % changes in the Indexes. Quarterly Data

Slow growth aided and abetted by aggressive monetary policy while disinflationary, threatens growth and fiscal sustainability. It discourages domestic capex and capital inflows to fund them that might have improved longer term growth prospects.  Slower growth expected frightens capital away and tends to weaken the rand- and raise inflation rates.  Doubts that the GNU would survive the arguments over the 2025-26 Budget proposals led to some rand weakness. The agreements on the Budget reached finally in May 2025 have reinforced the GNU and added rand strength (see below) For the ZAR it is the supply side – the outlook for growth that matters most for the rand and in turn inflation.

Political developments and the ZAR in 2024-2025. Daily Data. Lower numbers indicate rand strength.

Long term interest rates, their levels and differences with US rates have still to register any marked change in sentiment about the outlook for SA growth or inflation. Forward exchange rates still expect the rand to weaken at about 5% p.a. over the next five years. (see below) And bond market yields- the difference between high vanilla bonds and elevated inflation protected RSA interest rates – indicate that inflation is still expected to average over 6% p.a. over the next ten years. Meaning expensive debt to add to fiscal strain.

Expected inflation and the cost of hedging the ZAR will not narrow, nor borrowing costs decline meaningfully, absent any significant improvement in the SA growth outlook. But nonetheless a welcome 3% p.a. inflation in SA could be sustained absent any exchange rate shocks initiated by politicians, local and foreign. Would setting a 3% inflation target mean more growth sensitive management of the demand side of the economy? Would it secure rand stability? Only possibly.  It might however encourage the worst, anti-growth instincts of the Bank to prevail, especially when the supply side of the economy, the exchange rate, does not play ball.

The five-year RSA-USA carry and the realised annual move (% p.a) in the USD/ZAR (Daily Data 2016-2025 June)

SA and the USA; Actual inflation and Expected Inflation over the next 10 years (2016-2025)

Well maintained homes in my neighbourhood continue to be demolished at an impressive rate. Demolition in is being ordered so that the land released can be converted to a new residential unit or two or more. A process also well under way widely in the Western Cape. But conspicuous by its absence in much of the rest of SA.

If the demolition is to make economic sense the to be  realised market value of the new units constructed must be expected to exceed the purchase price of the old building, the significant costs of constructing the new units, the demolition costs and the interest income sacrificed on the working capital tied up in the project would have to be covered as would the price paid for the established building demolished or expensively redeveloped. The purchase price paid will be approximately equal to the present value of the future rentals being sacrificed on demolition.

Any extant building survives because a potential re-development of it does not meet this profit test. Most buildings (slowly) survive the test of time.  Look around you. It takes rising rentals, or rental income effectively sacrificed by owner occupiers, to encourage re-development. Escalating rentals add value to homes or commercial buildings and encourage owners to sell up and move on.  And add value, that is additional wealth and spending power for their owners. It takes a growing economy to change the face of the nation.

Sadly, for the average home or building owner in South Africa, or those owning commercial property, the rental tide has been receding, outside of the Cape. The legitimate dreams, based on past performance, of millions of homeowners and landlords of buildings generating hoped for wealth for them, has been frustrated. They should blame the national government for the economic policies that have failed. And moreover, blame local governments who, egregiously, have raised taxes on their homes to deliver far inferior services in exchange. Terrible wealth destroyers they have proved to be.

Between 2010 and 2024, annual returns calculated from owning the average home, including rental income, assumed to have increased at the rate of inflation, and reinvested or used to pay down mortgage debt, was on average 4.2% p.a. Annual average returns from the listed REITS have been an average 5.6% p.a. while the JSE delivered much more, 11.7% p.a. on average, also including dividends reinvested. Even the low-risk money market returned more than homes or listed real estate. Some 6.2% p.a. on average. Inflation averaged 5.1% over the fifteen years. A million rand invested fifteen years ago in the stock market would be worth R5.3m today, the average million rand home then would fetch but R1.84m and an average R1m portfolio of commercial and industrial property would by now have compounded to about R2.5m. That is by about the same increases in the prices of the average basket of consumer goods, up by about 200% in the fifteen years.

Investment Returns; Shares, Real Estate. Cash (Income reinvested) and the CPI. 2010-2024 (2010=100)

Source; OECD, Reserve Bank of South Africa and Investec Wealth and Investment

Consistently, the average increase in mortgage advances since 2010 has averaged but 4.3% p.a. close to the average increase in house prices. Recently this growth rate has fallen further to about 2% p.a. The housing market has not been particularly good for banks- or might one say the banks, especially the Reserve Bank, has not been very good for the housing market, given very expensive mortgage loans. 

Annual growth in house prices and mortgage advances (2010-2024)

Source; OECD, Reserve Bank of South Africa and Investec Wealth and Investment

If, a big IF, you could have rented your dream home fifteen years ago you would have done better renting than owning. Especially if you had saved the difference between the cash rent paid and the mortgage interest rate – say a 5% p.a average yield gap – into the share market.

The total internal investment return on a property is the sum of the initial year one rental yield plus the rate at which the rents are expected to escalate over say the next 15 years. For much of the past 15 years the expectations of rental escalations and consequent capital gains must have been disappointed (outside the Cape) Thus renters rather than owners would have been favoured by the persistent gap between lower rental yields and higher mortgage rates.

What comes next for renters or owners of real estate will depend on the state of the economy and the competence of municipal authorities.  If property prices and rentals continue to rise at their recent pedestrian price, rental yields will rise to compete with punishingly high borrowing costs. Initial rental yields, (Rents/Value) will rise as the expected capital gains owning property fall away. Though rentals themselves may not rise much, given a depressed lack of demand for the space available. As has clearly happened with commercial property and the REITS. Much of the return from their shares is coming in the form  of dividends paid.

Real Estate Investment Trusts on the JSE. Index values and Dividend (net rental) Yields (2010-2024)

Source; OECD, Reserve Bank of South Africa and Investec Wealth and Investment

A revival of the economy and the property market with it could change the trajectory of real estate values, and help create income and wealth for many homeowners. And revive the construction sector in the old-fashioned way. By turning the old into the new to revitalise our cities and suburbs. It can happen with a clear vote for better governance, better policies and their execution. Surely very much possible – as the Cape proves.

You are only wealthy if you have saved a good proportion of your income over the years and not consumed it all, to sustain an extravagant lifestyle. It is however your wealth that makes your large incomes and consumption tolerated by the wider society. Thus making it possible for the talented and diligent and hard-working and, most important for a growing economy, the enterprising and innovative successful risk takers, to earn their high incomes legitimately and enjoy their consumption and also help create their most useful wealth.

The savings that add to wealth and most important are invested productively by the income seeking business organisation that also saves and borrows and undertakes capex on behalf of their owners. These firms are given the responsibility to manage the capital stock and all the complementary scarce resources that are entrusted to them. Including employing workers and managers whose wages and rewards will depend on the good returns on capital (savings) their employers are able to realise to sustain their enterprise.

The more such capital is created and made available to the economy in the form of plant, equipment, dams, roads and ports etc and the more efficiently they are managed, the higher will be the incomes earned by the poorer households. More capital raises the relative scarcity of labour and improves productivity and incomes. Which makes the people understandably willing to protect the wealth that funds real assets against damage or theft or violent expropriation by local or foreign invaders. The protection and respect for property, that is for capital or wealth, in turn encourages the potentially higher income earners to venture more, to earn more and to save and invest more in the capital stock. Thus serving the essential interests of the wider community.

The consumption of others is not helpful to you- it adds to the competition for scarce resources. Saving, accumulating wealth to fund an investment in real assets is very helpful for the many without much wealth. It is the large-scale waste of capital, extracted by taxes, as has been the case with our SOE’s, that should be condemned.

Such essential willingness to protect property is to be found in the Bible and the rabbinical commentaries on it. As I was pleased to discover at a recent joyous barmitzvah. The substance of the readings that day were the laws and regulations governing the protection of property and compensation for its damage, intentional or accidental. And about laws that also regulated the rights and obligations to an important asset class of those times, the slave. All food for my economist soul.

There was little more I could read that morning about the creation and purpose of wealth. I thought I would ask this question of the Torah and Rabbinical commentary, the Talmud using AI. Rab AI so to speak. Here is a summary of the responses received, with my reactions indicated between brackets.

“The Talmud places a strong emphasis on the importance of hard work and diligence. It acknowledges that while effort and work are important, ultimately, one’s success may also depend on divine blessing. (Unbelievers will call this luck) The Talmud establishes the principle that those who are wealthy have a responsibility to support the less fortunate. The act of giving is seen as a valuable pursuit, and generosity is highly praised. Wealth is viewed as a trust that comes with significant responsibilities – that one should use their wealth not just for personal pleasure but also for the betterment of society. This includes supporting community needs and contributing to public welfare. (My point about the social purpose of wealth being the creation and preservation of the productive capital stock for the benefit of the greater society, has not apparently been recognised)

The Talmud warns against excessive attachment to wealth. A person should not let the pursuit of wealth dominate their life to the detriment of their spiritual and ethical responsibilities, that through work and the creation of wealth, one can achieve personal and communal fulfilment.”

(Ancient wisdom that is clearly consistent with human aspiration and economic development that implicitly recognises inevitable differences in economic outcomes as socially helpful)

A large threat to the long-term growth prospects of the SA economy is the loss of essential skills to emigration. Such losses have been a continuous drain on the growth potential of our economy both pre and post our democracy. That Trump saw fit to take the back of white South Africans could be even more damaging to South Africa than he imposing higher tariffs or denying aid. What if the US decided that badly treated South Africans with skills and the right aspirations would be very welcome in the US? A drain of emigration could become a flood. A severe potential loss that could be avoided by seeking the friendship and support of the US rather than so gratuitously incurring its ire and enmity.

How could this be done to the great benefit of South Africa and its growth prospects? I would suggest by doing in SA what Trump aspires for the US. That is for SA to become a truly colour blind and meritocratic society and economy. Which it is not. Our policies have focused on restitution for a black South Africans rather than stimulating growth. Understandable perhaps but self-defeating- making growth that would benefit the many so hard to realise.

Growth rates would surely be greatly enhanced by unfettered competition for jobs and for contracts to supply the State and its agencies. A process that would be particularly helpful to the least advantaged poor of South Africa. In the form of many more well-paid jobs and indirectly in the form of better education and health care that only a prosperous and competitive economy could afford. BEE clearly does not benefit them. There must come a time when the highly educated and talented black elite of South Africa are willing to compete on their own considerable merits with all the competition for the commanding heights of the economy and its governance. The sooner the better for growth and our international standing.

Faster growth may not reduce inequality and moreover, should not be expected to do so. To them that have may well be given. And be resented accordingly when it has a racial or ethnic connotation. But envy should not be allowed to frustrate the realisation of the greater good as it has to date. Higher incomes earned fairly by providing superior service to customers and employers should be applauded not resented. Growth is a positive sum game.

How badly has the South African economy been doing? According to the recent extensive Survey of Income and Expenditure and Income (PO100) of 19,940 SA Households conducted by Stats SA so much worse than could ever have been imagined. It has come up with a literally unbelievable estimates of household income and expenditure and their distribution by race. These estimates of household expenditure and income are also widely different from the national income estimates. And should be rejected.

Between 2006 and 2023, inflation adjusted household consumption expenditure of all SA households is estimated to have declined absolutely by a real 1.9%. Real Black household expenditure, with a 62% share of all spending, is estimated to have risen by an impressive 36.2% over these years. While the household spending of increasingly poor white SA households is estimated to have declined by 21%. Households headed by those with a tertiary qualification did even worse- they apparently saw their expenditures decline by 29.2% between 2006 and 2023. No case for envy here if it were so.

The income story told is less depressing. Black headed households are estimated to have seen their incomes rise by 46% between 2006 and 2023. While white incomes declined by only 7.7%. All household incomes are estimated to have grown by 5% since 2006. Suggesting a completely implausible and unobserved increase in real household savings – the difference between incomes and expenditure.

By contrast the National Income Statistics record that real household disposable income rose by 42% between 2006 and 2023, while real household consumption expenditure increased in line by 37% over the period (see below) Such inexplicable differences in the measures of income and expenditure need reconciliation. And what does it all imply for the reconstruction of the weights in the CPI that depend on the Survey? And for our measures of inflation?

by Brian Kantor and David Holland

We hear frequent complaints from state-owned enterprises (SOEs) that they are struggling to meet their debt obligations and need to be recapitalised. Yet the SOEs are simply not generating enough return on capital invested (ROIC) to justify allocating more capital to them.

Let’s take Transnet as an example. Transnet’s return on invested capital (ROIC) was 1.0% in 2024, which is lower than the miserable ROIC of 1.5% posted in 2023. The cost of debt on long-term South African government debt is 11%. This is the bare minimum cost of capital Transnet should meet. Transnet is destroying over 30 billion rand in economic profit every year when the difference between its return on capital and its opportunity cost is considered. A terrible unaffordable waste.

There are two key value drivers that feed into ROIC: operating margin and asset turns. To improve the operating margin, Transnet needs to increase revenue AND bring down operating expenses. To meet an 11% cost of capital, Transnet needs to generate 47 billion rand in annual operating profit on its invested capital. Its profit from operations was 4.3 billion in 2024 (operating profit is before interest expenses). Assets need to be run more efficiently or sold to private parties that can do so.

The large SA state owned enterprises, Eskom and Transnet, among other SOEs including the Post Office and the trading divisions of most municipalities have not remotely met the requirement for an investable credit rating. They have not been able to contain their costs well enough to cover their interest bills let alone their true opportunity cost of capital. Nor have they properly maintained their Plant and Equipment. Fundamentally they have failed because the bottom line, that is an adequate return on invested capital, has had little influence on their behaviour. Without many eye-watering billions of maintenance capex, their ability to continue to supply essential services, indispensable for economic growth, is severely compromised.

The SA government now recognises that the only practical way to secure the supply of these essential services is to raise large investments of private capital. Of which there is no shortage, provided the terms are regarded as acceptable.

And it would only be a private company, with a bottom line that requires a risk-adjusted return on capital, that could realistically hope to control costs and preserve and improve the capital stock, to reliably supply essential services in the future. Any imaginary mythically reformed SOE –capable of containing costs and operating efficiently – but without the right private incentives- is not a viable option. We’ve been down this track too many times.

The agreed terms for private sector engagement would have to recognise the true market value of the plant (PPE) taken over by the new operator of a network or part of it. Given years of neglect, existing assets might have very little value to any new operator. The potential market value could be exchanged for equity held by the government in the new privately controlled suppliers.

The private operator would have to commit the extra capital required to guarantee a flow of essential services over the long run. And such extra capex, would have to be recognised in the tariffs and or charges made for what could be valuable access to the networks.

Complicated calculations or regulations of appropriate charges or tariffs do not have to be a barrier to private entry. Any private company that won a tender to enter a network, with a degree of monopoly power, would be highly conscious of the impact of the prices it could charge on demand, sensitive to degrees of capacity utilisation and so its bottom line. And would be very considerate of its growth prospects. Becoming a reliable supplier at a competitive price with market-related returns would be a valuable outcome for all stakeholders.

The purpose of any private- public partnership or initiative is a simple one. That is to secure the future supply of essential services for SA users without which SA incomes and output must stagnate or decline. This all-important objective, viewed realistically, must be top of officials’ minds engaged in any negotiation with potential private partners.

The differences in the value of residential property in Cape Twon and Gauteng – and in Durban and the upper market suburbs of all the other SA cities are most striking. I learn anecdotally of a modern multi-bedroomed home in a gated estate near Johannesburg, largely grid free, that is municipality free, that has been on the market for six months for an asking price of not much more than three million rand with no takers. The owner wants to move to Cape Town as do so many and the market is flooded with like homes. Palaces that would take R10m or more to build. The same 3 million would have difficulty in securing a well appointed two-bed roomed apartment in Sea Point.

The differences in property outcomes are easily explained. In the Cape property owners in the towns and suburbs get reasonable value for the wealth taxes and service charges they are forced to pay. This adds to rather than subtracts from property values. Unlike the abject failures of service delivery almost everywhere else that destroys demand for homes and valuations.

The sad news is that the hopes of many have been dashed. Those who have responsibly been saving, paying off their mortgages each month expecting that the growing equity in their homes would help fund their retirements when they downsized and cashed in. The expectation now is that the value of their homes has not and will not keep up with inflation.

I am informed by a leading property appraiser that on average commercial real estate in Cape Town is expected to increase in capital value by 6.5% p.a. – ahead of inflation expected – while equivalent property in Johannesburg is expected to gain but 3% p.a. Furthermore, the so-called capitalisation rate at which future rental incomes are discounted is lower for Cape Town property that a similar building in Johannesburg. A value adding  1.25% margin in favour of Cape Town discount rates is estimated.

Recent property transactions confirm this difference. The Table Bay Retail Mall was sold for an initial yield of 7.75% to Hyprop. The Mall of the South in Johannesburg was sold to RMB at a significantly higher initial rental yield of 9.5%. For landlords of residential property in Cape Town initial rental yields (net rents/Market Value) range from about 3% in the most favoured suburbs to about 5-6 percent where there is less competition. All consistent with expensive real estate.

It should be assumed that the total return expected by investors in real estate will be similar everywhere in SA. Flows of mobile capital make it so. But total returns come in two parts- an initial yield – in dividends or net rental income and in capital growth. Thus the more growth expected in net income the lower will be the initial yield for homes of similar quality. For cash strapped migrants relocating to the Cape it may seem easier to rent rather than buy- with expected capital growth conceded to the investor.

The good news for our cousins in the North is that their cost of living is dramatically lower than ours in Cape Town. The bigger and better the home the more consumption power it delivers and such delivery comes much less expensively in Joburg.

The opportunity to live in an inexpensive palace rather than a crowded bed-sitter for the same modest outlay, either in rentals paid or sacrificed by owner- occupiers, should surely be an attraction not to migrate. And enough of a saving to help owner-occupiers go off grid and behind gates. And to run a four by four to negotiate the potholes when off to their bushveld retreats.  

My New Year advice therefore is to buy more of what is cheap. To house up and take advantage of the bargain basement offers. And hope that all the bad news about service delivery is in the already low prices. The best performing asset class in SA in 2024 has been listed property. Residential property might just enjoy a similar rebound should service delivery unexpectedly improve rather than deteriorate further.  (see below)

Total Return To end Dec 2024. Property Vs The All Share Index

Source; Bloomberg and Investec Wealth & Investment

Looking back at the economy reminds how tough it has been in recent years for households and businesses dependent on the state of the SA economy. Since those pre-Covid days the economy has hardly grown at all. Compared to Q1 2019 GDP by June 2024 had gained a mere 5% over the five and a half years. (growth of less than 1% p.a)  Households are spending but 6% more than they did then and capital formation is down by about 14% in real terms. How could such a deterioration be allowed to take place?

Vital SA Economic Statistics. Supply and Demand. (2019=100) Quarterly Data.

Source; SA Reserve Bank and Investec Wealth and Investment.

Clearly the supply side of the economy performed poorly – led by the well documented, confidence sapping failures of the State-owned enterprises and of government generally, including those of the provinces and municipalities. But demand management by the Reserve Bank can also be held  responsible for at least some of the weakness. Much of the period since 2021 has been accompanied by much higher interest rates both absolutely and relatively to inflation. That is despite the grave weakness of demand for goods services and labour.

The Reserve Bank’s Monetary Policy Committee provides a full explanation on a regular basis for these interest rate settings. It has been fighting inflation and only inflation that rose after 2021 as the rand weakened so significantly after 2021. The idea of a dual mandate of the US Fed kind – low inflation and employment growth being the combined objective of monetary policy – has been  anathema to our determined inflation fighters.

Shocks to the price level caused by exchange rate weakness – unrelated to immediate monetary policy settings and inflation trends – are clearly not ignored when interest rates are set. Yet such shocks- decidedly not of the Reserve Bank’s doing-  lead inevitably to more inflation – then higher interest rates – and in turn still weaker demand – already under pressure from higher prices. Higher prices have their complex causes- but they also have (rationing effects) on the willingness to spend more- given minimal growth in income

The problem for SA and the Reserve Bank was that the ZAR weakened decidedly after 2021- and weakened against not only the US dollar but also vs other EM and commodity currencies. It was SA specific in nature clearly linked to the failures of government and the failure of the economy to grow that added to SA specific risks. The USD/ZAR, as had the average EM/ZAR and AUD/ZAR had recovered well from the Covid linked risk aversion that brought pressure on the ZAR and the market in SA Bonds. SA appears particularly vulnerable to Global Risk aversion. It may be recalled that the USD/ZAR had recovered to as little as R14 in early 2021. But then the sense of South African failures to realise economic growth took over the currency and Bond markets . And the weaker rand inevitably forced prices higher at a faster rate. Given the MO of the Reserve Bank.

The ZAR Vs the USD, the EM Basket and the Aussie Dollar. Daily Data 2019-2024 (2019=100)

                Source; Stats SA, Bloomberg and Investec Wealth and Investment.

Interest rates and the USD/ZAR 2019-2024. Monthly Data to September 2024

Source; Stats SA, Bloomberg and Investec Wealth and Investment.

The ZAR and Short-term Interest Rates. Daily Data (2019-2024)

Source; Stats SA, Bloomberg and Investec Wealth and Investment.

The connection between the foreign and domestic exchange value of the ZAR and the outlook for the SA economy has never been clearer. The GNU has raised the prospects for growth and the ZAR and the bond and equity markets have responded accordingly. Inflation is therefore on the way down. Over the past three months it has averaged but 2.4% p.a. Interest rates at the short end of the market have come down and will come down further provided the ZAR holds up. Not so much vs the US dollar, that may be getting a Trump boost, but also against the other currencies similarly affected by the USD. We should not expect the Reserve Bank to change its pro-cyclical approach. We should but insist and hope that the supply side weaknesses of the SA economy are well addressed. Raising the GDP growth rates to a modest 3% p.a. will not only promote economic and political stability, it will bring lower interest rates and less inflation.

I like to visit the local supermarkets. And not only for the usual reasons. It helps confirm my faith in the power of market forces. Fully evident in the impressively wide range of goods and services on offer.  

The SA retailers very adequately fulfil the all-important task that we have delegated to them. That is to deliver a wide range of goods, including food and medicine essential to life and happiness. The retailers are left mostly alone to manage a highly complex supply chain that involves, farms, ports, roads, trucks and ships, factories and warehouses, banks, landlords and regulators. And they manage the always complicated relations with workers and their supervisors to pack the shelves and fill the checkout counters and increasingly to deliver directly to homes.  

They are serving us well for highly robust reasons. That is to make a living. Mostly modest but some very impressive. Generating incomes for the owners and staff that will bear a close relationship to the difference between the costs of providing the essential service and the revenues generated. To generate profits they will have to prevent the corruption of the supply chain.  

Such profits will also depend on how well the retailer manages the promotion or demotion of managers and workers- including the succession plans for senior executives. The retailer as must any business manage successfully the relationship between the efforts of and rewards for the work force. Providing the right incentives to work harder or smarter remains highly relevant for containing costs, enhancing revenues, and the margins between them. Without which the firm would not survive the competition for the household budget.

The apparent “chasm” between the pay of the CEO and the average worker should be regarded as an important part of the market in action. To be admired rather than resented as representing the natural outcome of the supply and demand for very different capabilities and talents at work. As explaining the wide difference between what Taylor Swift and her hair stylist takes home after a show, given their very different contribution to the bottom line. Such inequalities of rewards  are part of the necessary incentives for the best and brightest to ascend the highly competitive and greasy corporate poles to make a better fist of it.  We can’t all hope to be as good as a Taylor Swift, or an exceptional CEO. Yet whose contribution to the bottom line will never be as obvious as that of a Prima Donna.

Moreover, the resulting flow of profits realised will largely be retained by the owners and invested in the firm to improve the offers to households. Profits are good for customers. But the profits they realise are not fully under the control of the retailer. They depend heavily on the purchasing power of their customers, their incomes, that in turn depend on how well the economy at large is being managed. The SA economy has acted as a serious headwind for the retailers and even more so for their local suppliers. A headwind revealed in the form of declining returns on capital employed, and in goods that move more slowly off the shelves for want of demand. And call for more working capital to back up delays in the ports and distribution centres and by load shedding. The result of which are poorer returns on all the extra capital employed and less invested in new plant and equipment and in the work force.

The failures of the SA economy have much to do with the unwillingness of the economic power brokers to follow the example of the retail sector. As in the persistent but unrealistic, given past performance, faith in a reformed SOE’s and government departments to raise their games. Rather than contracting out much more of production to the private sector- honestly selected and helpfully incentivised to deliver as are our retailers.

They refuse to do so for their selfish reasons, as well as misguided notions of how an economy works best. Yet they must know that the slow growth outcome is a consistent threat to their influence. “As hulle net geweet het wat ek geweet het…”  (if only they knew what I know) learnt shopping with eyes and minds open to the evidence, SA would be, could still be, in a much happier state for retailers and their customers.