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Country Report South Africa

Country Report


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After a highly difficult 2013, in which domestic and global developments exposed South Africa’s vulnerabilities, ANC’s victory in May’s elections should improve policy and economic perspectives.

Strengths (+) and weaknesses (-)

(+) Strong institutions and deep financial markets

South Africa has strong institutions and one of the most sophisticated financial markets in the world. That has attracted large volumes of foreign capital and rendered South Africa the gate for investing in the rest of the continent.

(-) Constraints to growth

A large infrastructure (especially energy) deficit, rigid producer and labour markets and skills shortages constrain South Africa’s potential economic growth.

(-) Poor development

Society is highly prone to unrest due to widespread poverty and one of the highest levels of inequality. Besides, the young (48% of the population) are jobless (50% youth unemployment) and are politically disengaged (only 1/3 registered for voting), which increases such a risk.

 (-) Large twin deficit

South Africa’s financing needs are high on the back of a structural and large twin deficit. Therefore, the country is susceptible to domestic and global market sentiment, especially since net direct investment flows fall short of covering the current account deficit. 

Key developments

1. Protracted labour unrest hurts economic performance

Persistent labour unrest in 2013 hurt economic performance, but perspectives for 2014 are better, as the situation is improving, main export markets are recovering and energy supply increases. South Africa’s labour bargaining system is very peculiar, as it grants monopoly to the largest unions in any particular sector. Long lasting hegemony by these unions and alliance with the ANC, has resulted in leaders who prioritise defending their influence in politics and business above representing their members’ interests. Discontent with this situation among workers fostered the formation of new labour unions. As all unions were competing for members, they took a more militant approach (higher demands, strikes) to convince workers that they were representing their interests best. In platinum, where this battle for dominance has been particularly intense, labour unrest is continuing as a 4 month strike has reached no resolution yet. Labour unrest had a detrimental effect on economic activity in 2013. The impact was not only direct, through lower output in mining and manufacturing, but also indirect, as it hurt consumer confidence and disposable income. Consequently, economic growth slowed from 2.5% in 2012 to 1.9% in 2013. Weak global commodity prices, uncertainty related to policy direction ahead of elections and energy supply shortages also played an important role. Looking forward, recovery in export markets and planned additional energy supply capacity will support a higher growth rate, forecast at 2.5% for 2014. However, risks to this scenario are tilted to the downside, as economic rebalancing in China could put more pressure on commodity prices, and monetary tightening and strikes in the platinum sector could further hurt output.   

2. External vulnerabilities exposed by Fed’s monetary tightening

South Africa’s large financing requirement and the high reliance on more volatile capital flows for funding it make it vulnerable to a reversal of such flows, but there are comfort giving factors. In the past year, announcements regarding tapering of the QE programme by the Fed led to sell-offs in Emerging Markets and South Africa was affected each time (see fig. 2). South Africa’s vulnerability stems from the high current account deficit (5.8% of GDP in 2013), against a backdrop of low FX reserves (USD 45bn or 4.5 months import cover). Besides, the country is highly reliant on volatile capital flows for funding, as stable net FDI flows (1% of GDP) fall short of covering the deficit. However, two aspects should support South Africa in preventing a liquidity crisis. First, the central bank is very independent and loyal to its inflation target, so monetary tightening can be expected and, combined with the deep financial markers, should stem dramatic capital outflows. Second, if there are significant capital outflows, depreciation should support external rebalancing towards exports and, thereby, reduce the external financing requirement. Unfortunately, after recording the smallest trade deficit in two years in 4Q13, such an adjustment was hindered by labour unrest in mining and energy supply shortages in 2014, but this is expected to improve in the second half of the year. Moreover, given the low share of FX denominated external debt (42% of external debt in 2012) and the net FX asset position (78% of GDP in 2012), depreciation would actually benefit South Africa. Besides, as only 8% of domestic loans are denominated in FX, the impact on local payment capability would be contained. All in all, South Africa remains vulnerable to developments on global financial markets, but it should be capable to stem a liquidity crisis.  

Figure 1: Growth slowed down in 2013
Figure 1: Growth slowed down in 2013Source: EIU
Figure 2: Fed QE tapering impact
Figure 2: Fed QE tapering impact Source: Reuters Ecowin

3. ANC’s victory in general elections paves way for more pragmatic policy

After a period in which ANC adopted populist policies to retain the support of the leftist factions, good results in the May 2014 elections should lead to a more pragmatic approach. Since the implementation of democracy in 1994, ANC has dominated the political scene on the back of its “liberation credentials” and a weak opposition, but also due to support from its alliance partners the Communist Party (CP) and the Congress of South African Trade Unions (COSATU). Rampant unemployment, a high level of poverty and income disparity, and pervasive corruption have eroded ANC’s legitimacy, so support from the alliance partners became crucial during the 2014 elections. Thus, internals rifts within the leftist faction pushed the ANC towards more populist policies, such as the Mineral and Petroleum Resources Amendment Bill that grants the state 20% ownership of any gas and oil venture and the right to increase its stake to 100% against agreed compensation. On 7 May, ANC won the elections with 62% of the votes, which is above the 60% psychological threshold regarded as a defeat for the party. Consequently, policy is expected to become more business friendly, in line with the National Development Plan. A divided left front within the ANC alliance might even allow for piecemeal improvements on structural issues, such as the rigid labour market. However, the comfortable win and ideological differences within the party will impede more fundamental reforms. To conclude, ANC’s comfortable election victory bodes well for more constructive and business friendly policy, but no structural reforms are expected.  

Factsheet of South Africa
factsheet of South AfricaSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

South Africa is the second largest economy and, according to the World Bank’s definition, the only middle income country in Sub Sahara Africa. The country is the largest platinum producer and one of the largest gold producers worldwide and mining products represent an important foreign currency earner, exposing South Africa to volatility on these markets. However, services provide the largest share (3/4) of employment. The economy is relatively developed and diversified. However, market inefficiencies such as monopolistic structures in many sectors, a dysfunctional labour market and skills mismatch hamper the development of the private sector and keep unemployment at high levels of 25% (36% including discouraged workers). The society is characterized by an economic-geographic divide (e.g. economic areas are far from the poor and inaccessible due to high transportation costs). Corruption and capacity constraints have limited the impact of higher spending on development. Indeed, despite the introduction of a social benefits system that covers 30% of the population, poverty and inequality are pervasive. Crime rates are some of the highest in the world and South Africa hosts the largest number of HIV infected people (6mln). In 1994, South Africa abolished apartheid in favour of majority rule. A new constitution was adopted. The country is characterized by a robust separation of powers between the executive, the legislative and the judiciary, and independent institutions such as the Supreme Court. Parliament is elected every five years and appoints the president, who holds an executive function. South Africa plays a leading role in regional security and commercial efforts, being a member of several unions, and represents the continent in international forums and summits. 

Economic indicators of South Africa
Economic indicators of South AfricaSource: EIU
Alexandra Dumitru
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO

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