Higher growth needed in South Africa

South Africa?s is the undisputed leading power in Sub-Saharan Africa faces an economic recovery still too flat but a a very good business environment.
Analisis Credito y Caución
Madrid - 09-ago-2011

South Africas is the undisputed leading power in Sub-Saharan Africa and a driving force for political cooperation and economic integration within the Southern African Development Community [SADC]. Additionally, South Africa is a member of the G20 and is looking for closer political and economic cooperation with other major emerging markets such as Brazil, China and India. In spite of a very good business environment, South Africas social climate remains problematic, with a high crime rate, illegal immigration, racial tensions, high unemployment inequality, poverty, and widespread HIV/AIDS, with 16% of working age population infected.

South Africa has slowly recovered from the 2009 recession, when it suffered a 1.7% GDP contraction, with GDP growing by 2.8% last year. In Q1 of 2011 output grew 3.6% year-on-year and 4.8% on the previous quarter, as gross domestic spending rose 8.3% year-on-year, with government expenditure increasing 9.5% and household spending, which accounts for two thirds of demand, up 5.2%. Exports also recovered throughout 2010 and into 2011, and manufacturing output rebounded 5% in 2010 after a 12.7% slump in 2009, and has continued to grow in 2011. That said, manufacturing growth slowed down to 0.4% in April year-on-year after having reached 6% in February and 4.6% in March.

Many structural problems persist

Despite the recovery South Africas economy is structurally too flat to create enough new employment, as many jobs were lost during the recession and employment growth since then has been due mainly to job creation in the public sector. Officially the unemployment rate was 25% in Q1 of 2011, but the unofficial rate is probably more like 30-40%.

South Africas agricultural, mining and financial sectors are strong, but the business environment in the manufacturing sector is still problematic. Despite the high unemployment rate, there is a shortage of skilled labour, especially in the technical sector. Rigid labour laws are hampering business expansion, and have recently led to the closure of many textile/garment factories.

Another issue is that of infrastructure bottlenecks, especially power shortages resulting from past underinvestment and increased demand. Eskom, the state-owned power utility, will not be able to provide adequate electricity until 2013/14, when two new coal power plants will be completed. Beside power supply, railways and ports also need to be upgraded. However, South Africas infrastructure is better than other countries in the region.

High fiscal deficits remain

In spite of the rebound, fiscal deficits are persistently high, projected to be 5.4% of GDP in 2011, as the government has stepped up spending on job creation programmes to meet Presidents aim of creating five million jobs over the next decade. At the same time, the government is investing in education, social welfare and service delivery, and public infrastructure and the deficits can be largely financed domestically.

The South African Reserve Bank has supported the economic recovery by lowering interest rates. The prime rate has gradually decreased from 15.5% in June 2008 to 5.5% in November 2010 - a 30 year low - and has remained unchanged so far this year. However, the central bank may raise rates later this year as inflation accelerates. In May it reached 4.6%, the fastest growth in 12 months, and, with higher food and fuel prices, it is forecast reach 4.9% year-on-year in 2011.

Slow growth, but solid foundations

There are signs that some of South Africas institutions are slowly eroding. With fraud and corruption rising, press freedom may become limited and the independence of the judiciary may come under pressure.

After a 3.7% growth this year, GDP is forecast to increase 4.8% in 2012, while manufacturing production will grow 5.7% in 2011 and increase by 6.5% next year. However, employment has not recovered and stimulus measures will lead to large budget deficits: 5.4% of GDP this year 4.9% in 2012. Altogether, the rebound is still too dependent on expansionary fiscal policies. Inflation is expected to rise further in 2012 - to 5.3% year-on-year - which could lead to interest increases by the central bank.

Credito y Caución expects to see modest growth in the mining sector, with coal outperforming other subsectors. The infrastructure sector is experiencing a post-World Cup slump with contract opportunities severely depleted. However, retail is picking up, boosted by higher wages.

Externally, South Africas liquidity and solvency situation remains robust. However, rapidly increasing imports will put the current account balance further into deficit, forecast to be 5.8% of GDP in 2012, making South Africa even more dependent on capital inflows. But continued pressure from the ANC's left wing for less privatisation and even the nationalisation of key sectors like banks and mining and increasing market intervention by the government could negatively affect international investors´ sentiment.

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