South Africa is increasingly being left behind by its emerging market peers, whose economies are growing much faster and attracting significantly more investment.
Over the last two years, emerging markets have grown their economies by over 4% per year, while South Africa has averaged less than 1%.
The country fares even worse in comparison to its fellow BRICS members, with India’s economy growing over 8% in 2023 and 6.5% in 2024.
China managed to grow its economy, the second-largest in the world, by over 4.5% in both 2023 and 2024, while Russia only managed around 3.5%.
This poor performance by South Africa relative to its peers was revealed by the Reserve Bank in its latest Monetary Policy Review.
The Reserve Bank releases a Monetary Policy Review twice a year to outline trends in inflation and interest rates worldwide, comparing its monetary policy with that of its peers.
It also pays some attention to the performance of the local economy to analyse whether its monetary policy is restricting economic growth.
The bank said that domestic economic activity has been subdued over the past two years, with growth slowing to below 1% in 2023 and 2024.
This continues a decade-long period where South Africa’s average annual economic growth rate was less than 1%. Crucially, this is below the country’s population growth rate.
“The slow growth largely reflects the marked decline in the performance of key state-owned network industries,” the Reserve Bank said.
It explained that severe load-shedding and logistical challenges hinder economic activity and reduce the economy’s potential growth rate.
High production costs and a loss of competitiveness have also dragged down output growth, with local exports not being attractive in the global marketplace.
This is in stark contrast to South Africa’s emerging market peers and even its fellow African states, which have grown strongly in the last few years.
South Africa’s economic growth is compared to its emerging market peers in the graph below, courtesy of the Reserve Bank.
South Africa losing out
One of the main differences between South Africa and its emerging market peers is the country’s lack of fixed investment.
The Reserve Bank said real gross fixed capital formation (GFCF) remained poor, with all components lower than their 2019 levels.
This should improve in the coming years, partly because it is coming off a low base and also because of Eskom’s significantly improved performance.
Ongoing port and rail reforms, along with Eskom’s maintenance and transmission system development, should gradually ease supply bottlenecks and spur investment.
After contracting by 3.7% in 2024, investment growth is expected to rebound to 2.1% this year and rise to 3.6% by the end of the forecast period, underpinned by both the public and private sectors.
However, this will not be enough to drive meaningful economic growth in South Africa, with the International Monetary Fund (IMF) expecting the gap between it and other emerging markets to widen in the future.
The country continues to lose out on valuable investment to other emerging markets and its African peers as it remains an unattractive place to allocate capital.
The country slipped to fourth in the RMB Invest in Africa rankings, losing out to the Seychelles, Mauritius and Egypt.
South Africa ranked first in only one category – forex stability and liquidity – while it lost the top spot in terms of economic output to Egypt.
Worryingly for the future, it also came in last place on the continent regarding GDP growth forecasts, income inequality and unemployment.
Standard Bank CEO Sim Tshabalala explained that South Africa competes for capital and is currently losing this competition to countries that have better economic growth and are less risky.
“The world competes for capital. We compete for the money we need to finance our nation’s budget deficit and compete globally for the money to finance infrastructure investment, fund Eskom and Transnet, and finance corporate projects,” Tshabalala said.
“We are competing on the continent and with emerging markets for this capital. So if they have decreased the risk of investing in their country and generated greater returns, the money will then rather go to those places than South Africa.”