In spite of a recent uptick in business confidence, investors won’t commit to South Africa if there’s uncertainty about the president’s ability to control the military, says Lisette IJssel de Schepper, chief economist of the Bureau for Economic Research (BER).
“It’s certainly a risk that investors did not think they’d have to worry about going into 2026,” she says. “The president’s got a very short window now to address this. If it is not addressed properly, if heads don’t roll, if there’s no clarity on this front, then we’ll see how quickly signs of investor confidence in our fourth-quarter index can evaporate.”
South Africa’s military exercises with Russia, China and Iran and doubts about the president’s — and by extension civilian — control over the military after his instructions to exclude Iran were ignored are “extremely concerning” and will “absolutely” affect investor confidence.
“As a businessperson wanting to invest in a country, you really shouldn’t have to be concerned about whether the minister of defence is co-operating with the president and whether the president is in control of his cabinet.
“That is introducing a worrying layer of uncertainty and again adds to the risk that investors who have signalled a measure of confidence now have to price in.”
As a businessperson wanting to invest in a country, you really shouldn’t have to be concerned about whether the minister of defence is co-operating with the president and whether the president is in control of his cabinet.
— Lisette IJssel de Schepper, chief economist of the Bureau for Economic Research
Decisive action by the president around the military exercise fiasco could, on the other hand, be hugely positive, she says.
If we don’t see this, then something that was far from top of mind for investors until recently — civilian control over the military — will be a major concern.
“It cannot be underestimated as a risk if action is not taken, especially as we head into all important local government elections when you might have at a regional level, and KwaZulu-Natal comes to mind, renewed uncertainties, or parties that are less strict about the rule of law coming into power.
“This is concerning. It shouldn’t be a risk; it should be one of those things that investors are certain about. The fact that businesses again need to think about the rule of law being implemented, and the president being properly in charge of everything he needs to be in charge of, is a worrying development.”
There are some positives, however. Inflation remains subdued, fuel prices are coming down, and interest rates are likely to come down a bit more, which will increase consumer demand.
But even if concerns about the military going rogue are decisively addressed, and business confidence and investment start ticking up, it’s difficult to see how that is going to create the necessary employment, De Schepper says.
“It’s all good and well seeing money flowing into our bond market and equity market and so forth, but that’s not creating the jobs that we need. Outside of the fact that there’s no structural load-shedding, we haven’t really felt the benefits of reform as yet. Before we start seeing the improvements and living the improvements, there’s only so much that improved sentiment will do.”
A survey late last year by the Organisation for Economic Co-operation and Development (OECD) ranked South Africa worst among emerging markets in terms of regulations that increase compliance costs that discourage businesses from investing.
‘Cost of doing business’
“The problem is clear; it has been presented in different ways and formats to the government. We have red tape-cutting committees; it gets mentioned in every speech, but nothing gets done about it. It all comes back to the cost of doing business. It is not getting any cheaper or easier to do business in South Africa.
“Even if you jump through all the hoops, it then takes far too long to get the permits and licences you need. You see this in the mining sector, you see it with things that just should be faster, because the rest of the world is doing these things faster.”
De Schepper says they have “relatively bullish conversations” with investors, “but this comes after a horrible decade when we grew 0.8% over the last 10 years. If we talk about 1.5% now, it’s double that, so there’s still some interest. But it’s not enough. In terms of business investment we’re still 15% or 20% below pre-Covid levels.”
The question is whether the government has the appetite and political will to drive the reform investors need to see.
“I think the appetite is there. But the sense of urgency that towards the end of 2024 and heading into 2025 was really top of mind and on every politician’s lips has been lost. It has not been translated into action or tangible results. Hopefully, the local government elections this year will inspire some urgency once again.”
In spite of business confidence ticking up last year, investment levels are far too low, she says.
“The only thing growing the economy at the moment is consumer spending, and we know that you can’t sustain an economy on consumer spending. That is what is driving the bit of growth momentum that we see. But at some point the consumer runs out of money if he doesn’t have a job, or his son or neighbour and so forth doesn’t have a job.
“So it’s buying us a little bit of time for the investment engine to start running, but at the moment it is still stuttering. If you dive into the nitty-gritty detail of our investment data, you see a quarterly increase. Something looks a little bit better, something happens, but you don’t see that momentum building on itself. Forty percent unemployment is not sustainable. That is the real concern. The potential social unrest that comes with an unemployment rate like that is a risk that needs to be priced in.”
It makes recent talk about the commitment of the military to civilian control, and even concerns about a military coup, extremely concerning, she says.
“That was flagged by the minister in the Presidency as a risk last year, and everyone shrugged it off; it was glossed over. But it is certainly a bigger risk now. It should not be something you are having to worry about when you make investment decisions about South Africa, this renewed uncertainty about your president and his control over the national defence force and his cabinet.”
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