Markets reward stability amid structural constraints

South Africa’s macro narrative has shifted from emergency management to calibrated normalisation. The government’s Integrated Resource Plan 2025 outlines accelerated renewable, gas and nuclear capacity to cut load-shedding hours by half within 18 months, seeking to offset the cumulative 1–1.5 percentage-point drag power shortages imposed on GDP since 2015.

Real GDP expanded 0.5 percent in 2024 and is projected to rise about 1.3 percent in 2025, while headline inflation at 3.3 percent in August sits comfortably inside the 3–6 percent target band. The Treasury’s fiscal deficit is tracking near 4.8 percent of GDP in FY 2025/26, and gross public debt is stabilising around 77 percent of GDP, aided by expenditure ceilings and a freeze on new guarantees to state firms.

Eskom’s turnaround is central to policy credibility. The utility recorded a R16 billion profit for FY 2025—its first since 2016—after trimming borrowing and improving collections, though municipal arrears exceeded R103 billion by August. Regulated tariff increases of 12.74 percent for direct consumers and 11.32 percent for municipalities strengthen cash flow but lift administered prices feeding into core CPI. These dynamics restrict the South African Reserve Bank’s ability to ease rates aggressively; with the repo at 8.25 percent, forward guidance implies gradual normalisation only once inflation expectations anchor near 4 percent and load-shedding costs fall materially. The interest-rate transmission channel remains narrow: real lending rates stay positive, keeping credit growth modest even as liquidity conditions stabilise.

The reaffirmation of Black Economic Empowerment policy before the 2026 election underscores the ANC’s commitment to continuity over liberalisation. With unemployment at 33 percent and private investors providing roughly 70 percent of fixed capital formation, empowerment rules sustain inclusion but slow factor mobility and productivity growth. Logistics bottlenecks compound these constraints. Transnet’s freight volumes remain 25 percent below pre-pandemic levels, eroding export competitiveness in mining and agriculture. Without faster rehabilitation of rail and port infrastructure, the multiplier from new power investment will undershoot potential, keeping potential output below 2.5 percent—well behind peer reformers such as Indonesia and Chile that are expanding near 4 percent.

Financial markets have priced this cautious stability. The rand [USDZAR=X] traded around 17.20 per USD on 21 October, supported by expectations that South Africa could exit the FATF grey list in 2026 and by higher commodity receipts. The 10-year government bond yield eased to about 8.9 percent, compressing spreads to roughly 470 basis points over the US 10-year [US10Y]. The local yield curve has flattened modestly as inflation volatility subsides, while foreign portfolio flows turned positive in Q3 after R9 billion of outflows earlier in the year. Equity valuations remain subdued at about 9 times forward earnings on the JSE All Share [.JALSH], reflecting investors’ preference for evidence of delivered generation capacity and fiscal discipline before rerating.

Sectoral effects are uneven. Power-intensive manufacturers benefit from improved supply predictability, yet higher tariffs curb margin recovery. Mining output is rebounding as energy reliability improves, but logistics limits still cap export growth. Banks gain from lower operational disruption and stabilising asset quality, though household spending remains constrained by energy and food prices. Sovereign risk dynamics are defined by fiscal arithmetic: debt-service costs consume roughly 22 percent of revenue, and the gross borrowing requirement of R600 billion in FY 2025/26 keeps the crowding-out channel active. Sustained investor confidence depends on the government maintaining its fiscal anchor and advancing infrastructure partnerships that crowd in private capital rather than expanding public leverage.

The forward test for South Africa’s credibility is measurable. By end-2026, success will hinge on limiting load-shedding below 500 hours annually, keeping Eskom arrears flat, anchoring CPI near 4 percent, maintaining 10-year yields below 8.5 percent, and holding USDZAR between 16.50 and 17.50. Achieving these thresholds would compress the sovereign spread by up to 100 basis points, reduce external-funding costs, and restore durable risk appetite for Africa’s most industrialised economy.