South Africa: The Economy
Published 8 December 2014
© Crown copyright 2014
This publication is licensed under the terms of the Open Government Licence v3.0 except where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/open-government-licence/version/3 or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: psi@nationalarchives.gov.uk.
Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned.
This publication is available at https://www.gov.uk/government/publications/south-africa-the-economy/south-africa-the-economy
0.1 This publication was archived on 5 August 2016.
This article is no longer current. Please refer to Overseas Business Risk - South Africa.
1. Summary
Economy bounces back but growth expectations remain modest. Reform to ease structural constraints is needed, with electricity the top priority. The global environment will also weigh on SA’s fortunes, and risks remain. But businesses see the opportunities – especially in accessing continental opportunities.
2. Detail
2.1 Improving indicators…
Over the past month, data on the South African economy have improved. The economy grew by 1.4% (year on year) in Q3 2014, after having avoided recession in Q2 . Inflation, at 5.9%, is back within the 3% to 6% target band, and risks – mainly due to falling global oil prices – are dampening. A local business confidence indicator has turned positive for the first time this year, and is at its highest level since 2008.
2.2 …but growth prospects remain modest
But the economy is set for just 1.4% growth for 2014. Reserve Bank research suggests SA’s trend growth is now a mere 2.5% – in 2008 it was 4%.
2.3 With structural constraints…
Falling long-term economic performance is mainly down to growing structural constraints. The main halt on economic activity is electricity supply – rolling blackouts are currently taking place. A new power station is planned to come online in 2015, but most analysts believe the constraint on growth will only be eased, not lifted.
Other constraints exist in transport, low levels of competition in some product markets and labour market rigidities. Over-indebted households also hold back consumer spending. Since 2008 the government has intervened to drive growth, but debt levels have increased – and is set to stabilise just below 50% of GDP in 2020. Finance Minister Nene majored on austerity in his recent mid-term budget statement.
2.4 …risks…
As one of the most open emerging markets, SA’s fate is intertwined with global economic developments. Continuing poor performance in the Eurozone – the EU accounts for a third of SA’s trade exports and over 80% of its FDI – concerns policymakers. Falling global commodity prices impact on SA exports (around 60% are commodities). A Chinese slowdown would hurt SA. QE withdrawal also threatens a falling and/or unstable Rand and SA’s external financing needs.
The main domestic risks are potential supply side disruptions and fiscal. Labour unrest in the platinum sector hurt economic activity in early 2014. SA’s 1.3 million civil servants are now negotiating their salaries with government – which could come to a head in early 2015 – currently with demands of 15%. State-owned enterprises (not just Eskom) are a risk to the economy and public purse. Monetary policy is finely balanced, walking the tightrope between interest rate normalisation and a growth inducing environment.
2.5 …and opportunities
But there are opportunities, too. The SA authorities are seized of the problems. In his mid-term budget speech Nene said “the biggest constraints…are domestic factors…things which are within our powers to fix”. Tight fiscal conditions and low growth are increasingly the impetus behind the National Development Plan (NDP), which aims for 6% growth. The Presidency is now running ‘Operation Phakisa’ (taken from Malaysia’s ‘Big Fast Results’ initiative), which is targeting intensive work to make trade-offs in specific areas, starting with the ocean economy.
Business doesn’t always find SA easy. But the underlying environment and the opportunity – especially the ability to access the continent from SA – continues to attract. There are huge potential prizes in a strongly growing SA economy and its planned £85 million infrastructure programme. SA is 43rd in the Ease of Doing Business, level with Belgium and far better than other BRICS. The recent creation of Coca-Cola Africa, with its headquarters in Port Elizabeth, demonstrated that global firms see SA as base to achieve high returns from Africa’s growth.
3. Comment
So the challenges are serious but not insurmountable. The World Bank described the NDP as an “ambitious but feasible” plan.
4. Disclaimer
The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.