South Africa: state of economic health - September 2014
Published 9 September 2014
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0.1 This publication was archived on 5 August 2016.
This article is no longer current. Please refer to Overseas Business Risk - South Africa.
0.2 Detail
Since it achieved 3.6% growth in 2011, South Africa’s economic growth has trended downwards. Economists expect around 1.5% for 2014. Many commentators say SA is at a crucial pivot point: the economy can be reformed and reinvigorated; or “stagflate” with low growth, high inflation and high unemployment.
External and Domestic Challenges
As the smallest G20 economy, the global economy impacts heavily on SA’s fortunes. Poor economic health in key EU and US export markets has hurt it, saved only by growing trade ties with China, its biggest single trading partner. Quantitative easing in advanced economies has both helped and hindered, causing the Rand to be one of the most volatile currencies in the world.
But domestic conditions are increasingly influential. The mining and manufacturing sectors are struggling. Economy hurting strikes with high wage demands, and increasingly the threat of violence, have become longer and more common. Pressure for long overdue racial transformation of the economy is building, with the ANC speaking of “radical economic transformation” . Constraints, such as in infrastructure and energy, continue to hold the economy back. Companies say that proliferating regulations, labour issues (such as difficulties in hiring and firing and poor education) and government bureaucracy are the most problematic factors in doing business. Reform and investment is needed.
There is little scope for stimulus measures. Inflation, at 6.3%, is above target and monetary policy is in a tightening cycle. Finance Minister Nene is trying to close a 4% GDP budget deficit and stem the rising tide of debt, without damaging the economy. Credit rating agencies are mindful of this: in June Standard & Poor’s downgraded SA’s credit rating to BBB-, one notch above junk, and Fitch put its BBB rating on negative watch.
Reasons to be optimistic
Zuma’s ANC government has championed the National Development Plan (NDP) as the solution. Drafted during the ANC’s last term of government, the highly regarded plan aims to solve SA’s social and economic ills, lifting growth to over 5%. The ANC has said that this term of government will see its implementation.
So far there have been both positive developments and positive noise on the NDP. A new debate on reforming the state energy generator Eskom and the role of private power producers has started. The ANC indicated it would introduce legislation limiting the damaging impact of strikes. And on 1 September, Cooperative Governance Minister Pravin Gordhan argued strongly for the need to improve service delivery. .
SA possesses some good starting blocks for a turnaround. It remains the easiest place to do business out of all the BRICS. The WEF ranks it as more competitive than Brazil and India. SA’s services sector, which contains a world class financial services industry and regulation, and agriculture are – in contrast to mining and manufacturing – growing. And as Africa’s most developed economy, it is well placed to ride the African growth wave.
One economist believes that the economy is now at the bottom of the cycle and “starting to upswing”. Improving data in advanced economies should boost exports, while inflationary pressures are easing, which should boost consumer spending. Most economists predict that the economy could grow closer to 3% next year, provided significant progress is made on addressing labour unrest and electricity supply disruptions.
0.3 Comment
The ANC under President Zuma look set to implement NDP reform slowly and steadily, rather than with a ‘big bang’.
Businesses and analysts alike believe SA’s economy and business environment need work, but remain upbeat about the long-term.
0.4 Disclaimer
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