South Africa is in a challenging position, with low growth hovering around 2%-2.5% when it should be 5% and above. Exports are very important. If the economy is going to grow, there needs to be an increase in local trade, export trade and support for infrastructure, says Greg Nosworthy, head of Euler Hermes South Africa.
Treasury’s forecasts have downgraded significantly, from 4.5% in 2010 to the current level of 2%-2.5%, says Nazmeera Moola, economist and strategist at Investec Asset Management.
The country’s biggest problem is the lack of export earnings, explains Moola. Import expenditure exceeds export earnings. The bulk of GDP is generated by the services sector, not from exports, which has resulted in the current account deficit, she says. More exports are needed to reduce the deficit, says Ludovic Subran, chief economist at Euler Hermes.
There has been a downward trend in export prices since mid-2013, says Moola. Prices have come down by 40% in total. The collapse in oil prices offered some benefit, however this highlights that there is a problem with the items being exported.
The country has been exporting commodities for the past 50 years. In 1964, SA mainly exported farming goods. By 1994 this changed to commodities like gold, platinum and iron ore. Not enough manufactured goods are exported and this is due to the energy crisis. There is limited electricity supply for manufacturing plants, explains Moola. Electricity intensity in the manufacturing sector is down 30%.
Comparing SA to other African countries, Nigeria’s economy has evolved from a soft commodity exports like crude and petroleum in 1962, to purely oil in 2012. Kenya has a more diversified economy. Besides commodities, it exports manufactured goods like clothing and cleaning materials, says Moola.
Other diversified economies like Ethiopia, Zambia and Mozambique are faring well. Given the commodity bust, countries built on commodities like Angola and Nigeria are having a hard time, with less investment and infrastructure spend, says Subran.
SA is a mixed case. It is a diversified economy, but commodities are a big market mover for GDP. There is potential for services and manufacturing sectors to contribute more to GDP, says Subran.
It’s quite a massive investment but they’re cutting the middle man and they’re making huge labour opportunity for thousands of individuals.
There should be more investment in the manufacturing sector. “You have commodities, you have the people who work, you need to industrialise the country,” says Subran. There needs to be a “game changer”. SA has the skills and commodities to develop entire industries downstream, this will equip the middle class through the “rebirth” of the manufacturing sector, he explains. This means developing the extraction and refining processes. “Why export to China to reimport to South Africa?”
This year Indonesia banned the export of raw nickel to China. The refining will take place in Indonesia and then materials will be exported. “It’s quite a massive investment but they’re cutting the middle man and they’re making huge labour opportunity for thousands of individuals,” says Subran. He admits this is not easy and private investment is necessary.
Countries move too fast from a commodity-based economy to a service-based economy. This only works in small countries where there are fewer people to feed and employ. Industrial revolutions are major job providers and they structure the private sector, says Subran.
Ways to Move SA Forward
Ralph Mupita, CEO of Old Mutual Emerging Markets highlights three options to take to move the SA forward.
1. Convert the trust deficit in the country to a trust surplus.
“South Africa is a very unequal society,” says Mupita. The trust deficit emanates from inequality. Government, businesses and the labour sector should engage to solve the problem by promoting minimum wage and improving productivity levels. SA is the fifth-most unequal society in the world, according to the Taylor Commission Report. Moola says that the high inequality does not mean that there has been no progress in alleviating poverty. There have been improvements in education, health and living standards.
2. Implementation of the NDP
“It is not a perfect plan, but no plan ever is,” says Mupita. It is still capable of creating economic growth, dealing with challenges of unemployment and inequality to achieve the 2030 goals. Aspects of the NDP that should be prioritised include resolving the energy crisis, which calls for investment by the private sector. The model in China should be adopted where power generation is handled by the private sector and distribution is handled by the public sector.
Says Subran: “The electricity problems need to be solved stat, it could be a massive disincentive for future investors.” The infrastructure deficit should also be addressed. The private sector should invest long-term capital projects that generate returns to overcome growth challenges.
Mupita says: “Private sector investment will alleviate government’s burden to try and fund everything.”
Lastly, the education system should of good quality and be affordable for accessibility. More people should graduate from the school system with the right skills relevant for the future, which will be digital- and technology-based, says Mupita.
Adds Moola: “If we don’t solve education, we will not solve the other problems that we want to.”
3. Play a meaningful role in the economic integration in the rest of the continent
Intra-Africa trade is lower than it should be and SA needs to play an active role in the effective integration in the SADC region. East Africa’s integration works best in terms of regional business integration. However there is not enough economic interdependency in SADC, says Mupita.
SA is isolated form other markets, which is why it needs to engage with neighbouring countries, and ultimately expand trade across the continent, says Moola.
Subran adds that a lot can happen out of SA, it can be used a springboard to develop the rest of the continent, in turn fostering development in the country too.
This article was featured on Finweek.com