The investment gap behind South Africa’s recovery story

Leading economists have recently suggested that South Africa could be approaching a turnaround.

Deloitte wrote in June: “If external pressures ease, the recovery trajectory could regain momentum from 2027 onward.”

Two weeks ago, RMB chief economist Isaah Mhlanga suggested that reforms, improving credit ratings and investor confidence were strengthening South Africa’s investment case, and highlighted the potential for reforms to translate into better growth and resilience despite external risks.

Last week Standard Bank Group’s chief economist, Goolam Ballim, told Bloomberg that South Africa is building towards “escape velocity”, with growth reaching 1.7% next year and 2% by 2028. The case rests on improving governance, better performing ports and rail, and the prospect that the Madlanga commission’s work on police and criminal justice failures could ultimately strengthen institutional credibility.

The Centre for Risk Analysis (CRA) outlook is more bearish because the investment data does not support fast economic growth.

The test for any growth story in South Africa is gross fixed capital formation, the measure of money going into infrastructure, plant and machinery. This is the number the CRA has flagged repeatedly in its Risk Alerts and strategic intelligence briefings, because it is the number that tells us whether growth is being built or borrowed.

In 2025, gross fixed capital formation fell 2.2% year on year, subtracting 0.3 of a percentage point from GDP. Fixed investment remains stuck in the 13%-15% of GDP range. The rate needed to lift South Africa onto a meaningfully faster growth path is 25%-30%. Regardless of which government initiative was announced in the interim, that gap has not narrowed in any of the past several years.

Household consumption, not investment, has done the heavy lifting for South Africa’s recent growth. In 2025, household final consumption expenditure grew 3.6% and contributed 2.4 percentage points to GDP growth on its own. That consumption is now under pressure from higher fuel and electricity costs, as well as higher interest rates. It is a fragile base for growth precisely because it can unwind as quickly as it built up. An economy growing because people are spending more – while the productive base that would let them keep spending is shrinking – is running on a temporary tailwind.

Uneven fragmentation

This is not to suggest that Ballim is wrong about governance quality mattering for investment decisions. It plainly does, and his point that capital chases confidence is correct, as far as it goes. The Madlanga commission process may in time prove clarifying rather than corrosive. But the commission’s final report has now been pushed from the end of August to November 16, safely past the November 4 local government elections, and a commission whose most sensitive findings are delayed past election day is not yet the kind of institutional signal that moves boardroom decisions on plant and infrastructure spending. Confidence is a lagging indicator of demonstrated capacity.

This is the core argument behind the CRA’s Fragmentation Spectrum framework. It suggests that South Africa is not moving cleanly towards order or towards collapse. It is fragmenting unevenly, with functioning and dysfunctional zones coexisting across geography and sector, often within the same city. The Western Cape’s quality of life index score of 5.9 sits well above the national average of 5.1, and a company in Cape Town’s northern suburbs faces a genuinely different risk environment than one in a secondary Mpumalanga town, even under identical national policy.

In that framework, our base case, Scenario A, is managed fragmentation. Incremental reforms continue at the margins, private actors keep substituting for state failure in security, health and infrastructure, and the aggregate national picture improves only slowly while the gap between best- and worst-performing regions widens. That is a story compatible with modest GDP growth in the 1%-2% band. It is not obviously compatible with sustained fixed investment breaking out of its sub-15% range.

The more optimistic outcome, Scenario B, requires policy changes we have not yet seen: meaningful restructuring of failing municipalities, relaxed restrictions on private education and health provision, the substantive strengthening of property rights, effective responses to crime and corruption, and significantly reduced regulatory burdens for growing firms – including through BEE reform.

Such policy reforms are required to lift growth from its current plodding levels to the brisker pace the country urgently requires. Electoral pressure ahead of the November 4 elections could force some of this. It has not yet done so, and the CRA weights this scenario below our base case.

Extra mining revenue, R30bn-R40bn for the 2026/27 fiscal year, has bought the fiscus some room. But given trade policy uncertainty and softening demand from China, commodity prices holding at current levels is a fragile assumption. Rather than supporting escape velocity, it is a foundation for the current base case: gradual, uneven improvement that leaves the investment gap unresolved.

Ballim’s framing may prove right in time. Institutional credibility genuinely can compound. But the number to watch is not the growth forecast for 2027 or 2028. It is this year’s gross fixed capital formation figure. Until that number moves, the escape velocity story remains a hypothesis, and unfortunately not yet a trend.

Chris Hattingh is the executive director of the Centre for Risk Analysis.

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_{Top image collage: Pexels/Sherissa; Rawpixel; Currency.}