South Africa must unlock financial sector for growth, says African Development Bank

Mail & Guardian

5 days ago

The African Development Bank (AfDB) says South Africa's well-developed financial sector has the potential to be the continent's powerhouse.
The African Development Bank (AfDB) says South Africa's well-developed financial sector has the potential to be the continent's powerhouse if structural constraints are addressed.
'South Africa has a well-developed and large financial sector with an asset-to-GDP ratio of 88%, well above that of most emerging markets. The financial system consists of banking institutions, pension funds and a dynamic stock exchange,' the bank said
Accounting for 20% of GDP, the country's financial sector provides broad access to financial services. More than 90% of the adult population uses formal financial services, with 81% holding bank accounts and 78% using non-bank financial institutions.
'The country needs a concerted focus on enhancing domestic capital mobilisation, more efficient public expenditure, and a stronger overall business environment to unlock greater investment and foster sustainable growth,' the AfDB said.
It urged the government to follow through with plans to enhance business growth by reducing red tape, fostering a supportive environment for small and medium enterprises, improving infrastructure, strengthening multilateral cooperation, clamping down on crime and promoting skills development.
'While the financial system is stable, non-performing loans rose from 4.7% of total loans in 2023 to 5.7% in 2024 due to weak business growth. Household financial distress from rising interest rates since late 2021 has led to mortgage defaults, but easing borrowing costs are expected to support the sector,' it said.
The development bank forecasts that South Africa's real GDP growth will remain subdued at 0.8% in 2025, with a likely uptick to 1.2% in 2026, depending on 'improved energy supply, freight rail and port management'.
It identifies some of the continued domestic risks as 'ongoing infrastructure deficits, unresolved problems in electricity provision,
'South Africa is one of Africa's most dynamic economies, underpinned by a diversified economic base, strategic geographic location and ongoing commitment to structural transformation,' the report said, noting however that economic growth has underperformed in the past three years to 2024, averaging 1.1%.
Factors such as China's economic slowdown, geopolitical tensions, climate vulnerabilities and trade disruptions are projected to further add uncertainty to the country's growth outlook.
The AfDB highlights strengthening institutions as essential to improving tax administration, corporate governance and capacity-building to make full use of natural, human, financial and private sector capital. Although the country has many advantages because of its location, targeted training, regional staff exchanges and international collaboration are vital to improving performance and resilience.
'GDP growth
The bank said South Africa's income inequality remains among the highest globally, with a Gini coefficient of 0.67 recorded in 2018.
'Government spending remains highly redistributive, with up to 61% of the budget allocated to the social wage — spending on health, education, social protection, community development and employment programmes,' the report said.
South Africa funds about
'To meet its Vision 2030 targets and the sustainable development goals, South Africa requires about $254 billion to $329 billion in financing for transport, water and sanitation and education between 2022 and 2030,' the report said.
Inefficiencies in public spending and underuse of business and natural resources limit the country's financial capacity.
'Unlocking South Africa's natural capital requires good governance, stronger institutional coordination, adherence to the rule of law, infrastructure development, and capacity development,' the AfDB said.