South Africa: economy overview

0
1032

Abundant resources, an advanced industrial sector, robust financial systems, a progressive legal framework – and the gateway to other African markets.

South African economy
The country remains rich with promise. (Image: Brand South Africa)

Brand South African reporter

While much of the world staggered in the wake of the global financial meltdown towards the end of the first decade of the new millennium, South Africa managed to stay on its feet – largely as a result of its prudent fiscal and monetary policies.

The country is politically stable and has a well capitalised banking system, abundant natural resources, well developed regulatory systems as well as research and development capabilities, and an established manufacturing base.

Ranked by the World Bank as an “upper middle-income country’, South Africa is the largest economy in Africa. In 2014, the World Bank listed its GDP at $350.1-billion (R5.416-trillion) and its population at 54 million. Per capita GDP is $6 483, according to the World Economic Forum.

The country remains rich with promise. It was admitted to the BRIC group of countries of Brazil, Russia, India and China (now known as BRICS) in 2011.

With a world-class and progressive legal framework, South African legislation governing commerce, labour and maritime issues is particularly strong, and laws on competition policy, copyright, patents, trademarks and disputes conform to international norms and standards. The country’s modern infrastructure supports the efficient distribution of goods throughout the southern African region.

The economy has a marked duality, with a sophisticated financial and industrial economy having grown alongside an underdeveloped informal economy. It is this “second economy’ which presents both potential and a developmental challenge.

Positive outlook

In its 2015-2016 Global Competitiveness Report, the World Economic Forum ranked South Africa 49th in its Global Competitiveness Index out of 140 economies, up from 56th in the previous reporting period. It ranked the country first for strength of auditing and reporting standards as well as financing through local equity market. South Africa was also ranked 12th for financial market development; it ranked 29th for market size, 33rd for business sophistication and 38th for innovation, out of 140.

In its 2014-15 Global Competitiveness Report, the World Economic Forum ranked South Africa second in the world for the accountability of its private institutions, and third for its financial market development, “indicating high confidence in South Africa’s financial markets at a time when trust is returning only slowly in many other parts of the world’. The country’s securities exchange, the JSE, is ranked among the top 20 in the world in terms of size.

Diversity and growth

South Africa’s success in reforming its economic policies is probably best reflected by its GDP figures, which reflected an unprecedented 62 quarters of uninterrupted economic growth between 1993 and 2007, when GDP rose by 5.1%. With South Africa’s increased integration into the global market, there was no escaping the impact of the 2008-09 global economic crisis, however, and GDP contracted to 3.1%.

The World Bank reports that while the economy continues to grow – driven largely by domestic consumption – growth is at a slower rate than previously forecast. Real GDP growth is estimated at 2.0% for 2015 and the same for 2016 “due to a combination of domestic constrains and external headwinds arising from the fall in commodity prices and slowdown of the Chinese economy”.

But the bank predicts a slight recovery in 2017 with real GDP growth estimated at 2.4% as new electricity supply comes on line.

According to figures from the National Treasury, total government aggregate spending will reach R1.56- trillion in 2017/18. This represents more than a doubling in expenditure since 2002/3 in real terms.

To ensure that there is a similar improvement in service-delivery outcomes, the government is putting in measures to strengthen the efficiency of public spending and to root out corruption.

It is allocating resources to South Africa’s core social and economic priorities while containing aggregate expenditure growth. Spending plans give effect to the priorities of the National Development Plan and the medium-term strategic framework. Spending on infrastructure investment and core social programmes has been protected.

Under its inflation-targeting policy, implemented by the South African Reserve Bank, prices have been fairly steady. In November 2015, the annual consumer inflation rate was 4.8%, rising from October’s 4.7%. However, this was down from an annual average in 2014 of 6.1%. Stable and low inflation protects living standards, especially of working families and low- income households.

South Africa has a diverse economy, with key sectors roughly contributing to GDP* as follows:

  • Agriculture: 2.2%
  • Mining: 10%
  • Manufacturing: 13.3%
  • Electricity and water: 2.6%
  • Construction: 3.9%
  • Wholesale, retail and motor trade, catering and accommodation: 14.6%
  • Transport, storage and communication: 9%
  • Finance, real estate and business services: 20.7%
  • Government services: 17.6%
  • Personal services: 5.9%

* Note: Percentages based on third quarter 2015 GDP data from Statistics SA.

The country’s outlook is affected both by national concerns, such as unrest in and pressure on the mining industry, as well as international sluggishness, with Europe as one of South Africa’s chief export destinations.

However, trade and industrial policies encourage local firms to explore new areas of growth based on improved competitiveness. China, India and Brazil offer significant opportunities. Infrastructure, mining, finance and retail developments across Africa are helping to fuel a growth trajectory in which South Africa can participate.

Challenges

South Africa’s economy grew by a marginal 0.7% in the third quarter of 2015, according to preliminary estimates of real gross domestic product (GDP) released by Statistics SA in November of the year, following a 1,3% contraction in the second quarter.

Three of the 10 main industry groups shrunk in size: agriculture, mining, and electricity, gas and water supply. Manufacturing has posted an uptick in growth. Agriculture, mining and manufacturing, traditionally labour intensive sectors that employ unskilled workers now account for 19% of total employment, down from about 30% in 2000; the services sector now accounts for 72% of total employment.

As the National Treasury is at pains to point out, development is not just the pursuit of growth – it is also about creating a more equitable future. The South African government is determined to address its key challenges through the economic integration of its previously disadvantaged majority.

Unemployment, at a rate of 25% (compared to an average of 11% for upper middle income countries, according to the World Bank), remains the most challenging of South Africa’s hurdles: it is at the top of government priorities and at the heart of its economic policies.

The New Growth Path, launched in November 2010, builds on plans to restructure the economy to ensure more inclusive and sustainable growth – and sets a target of creating five million new jobs by 2020. The road map to do this is provided by the Industrial Policy Action Plan, which proposes multisectoral interventions across agriculture, mining, manufacturing, tourism and other high-level services to create substantial employment.

South Africa’s dream of growing an inclusive economy by drawing on the energies of its people is given voice through the National Development Plan 2030, launched in August 2012.

The plan outlines two main strategic goals: to double GDP by 2030 and eliminate poverty, and to reduce inequality, as measured by the income Gini coefficient, from 0.70 to 0.60 by 2030 through expanding economic opportunity for all by:

  • Investing in and improving infrastructure, as well as supporting industries such as mining and agriculture;
  • Diversifying exports;
  • Strengthening links to faster-growing economies;
  • Enacting reforms to lower the cost of doing business;
  • Reducing constraints to growth in various sectors;
  • Moving to more efficient and climate-friendly production systems; and
  • Encouraging entrepreneurship and innovation.

Since 1994, South Africa’s working-age population aged 15 to 64, has grown by 11 million, according to the World Bank. The age group comprises 65% of the country’s total population of 54.9 million in 2015. More than half of the working-age population is under the age of 25, and the sector is expected to grow by another nine million in the next 50 years.

This is a “window of demographic opportunity” the bank says in its report, South Africa Economic Update: Focus on Jobs and South Africa’s Changing Demographics. The country could double its per capita income and eliminate extreme poverty by 2030 by generating jobs for its high and growing number of young workers.

Green economy

One of the most important elements of the New Growth Path is a green economy, and the potential the creation of a lower-carbon economy has as a job generator as well as a spur for industrial development.

President Jacob Zuma has committed South Africa to slowing its growth in greenhouse gas emissions by 34% by 2020, and by 42% by 2025.

In 2009, South Africa created its world leading Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), which put in place a target of 10 000 gigawatt hours of renewable energy.

It is targeting onshore wind, concentrated solar thermal, solar photovoltaic, biomass solid, biogas, landfill gas and small hydro power plants.

By May 2012, the government had approved 19 wind, solar and hydropower proposals worth R73-million to help boost clean energy.

By April 2015, the Department of Energy had approved 79 REIPPPP projects with 5 243MW being added to a national grid desperately in need of power, at a capital cost of R168-billion. The project winners had to supply all their own capital. About 40% of the spend is local content and thousands of jobs have been created.

Since 2011, the department had procured the renewable electricity in bid windows 1 to 4 of the REIPPPP and connected 37 projects, with a capacity of 1 827MW, to the national grid. On average, 15% of this energy was delivered to the power system during system peak periods, alleviating pressure on the power system.

The energy contribution should grow to approximately 7 000 gigawatt hours a year with the first 47 renewable energy independent power producers fully operational and producing at full capacity by mid-2016.

In 2011, the government entered into the Green Economic Accord, which aims to create 300 000 jobs in the next 10 years through investment in the green economy. In 2012, the Treasury allocated R800-million over two years to the Green Fund, which aims to provide finance for high-quality, high-impact, job-creating green economy projects around the country.

Infrastructure

Over the past decade, substantial increases in government social service spending have helped reduce poverty, but now the government has begun to place a greater emphasis on infrastructure, employment and economic growth.

South Africa will spend R813-billion on infrastructure over the next three years, and in the 2015/16 financial year, its capital expenditure programme will come to R274- billion.

In a massive public-sector investment, in the previous three-year budget cycle it spent R642-billion on infrastructure development – and it plans to spend more than R827-billion over the next three years to improve access to export markets and reduce costs in the economy.

In the 2015 budget, South Africa included an update on its infrastructure plan, saying infrastructure spending has been quite high for some time. Between 2009 and 2014, the country spent just over a R1-trillion on infrastructure.

In this fiscal year, most infrastructure spending will be on transport and logistics at R339-billion, followed by energy at R166-billion, and water and sanitation at R117- billion, over the next three years. At national government level, infrastructure spend will come to R451-billion over the medium term framework.

Most of the infrastructure projects undertaken by national government (83%) are co-ordinated by the Presidential Infrastructure Co-ordinating Commission.

Investors

The overall investment environment remains encouraging. A G20 country, South Africa is considered a low-risk investment destination for investors looking for a foothold into Africa. As the continent’s largest African investor, South Africa sends more than 25% of its manufactured products into the continent.

Through investment incentives and industrial financing interventions, the government actively seeks to encourage commercial activity and attract foreign capital.

Global foreign direct investment slowed by 16% to $1.23-trillion in 2014, according to the 2015 World Investment Report by the United Nations Conference on Trade and Development, released in June 2015. In line with this, the report said foreign direct investment flows into South Africa dropped by 31.2% to $5.8-billion in 2014, down from $8.3-billion in 2013.

This was off earnings of about R42-billion in foreign direct investment in 2011, which was more than four times the amount in 2010.

Principal international trading partners of South Africa (besides other African countries) include: China, the United States, Germany, Japan, and the United Kingdom.

Chief exports are metals and minerals. Machinery and transportation equipment make up more than one-third of the value of the country’s imports. Other imports include automobiles, chemicals, manufactured goods, and petroleum.

Ratings

  • South Africa is the second highest-ranked African country, after Mauritius, and third-placed among the BRICS economies in the World Economic Forum’s 2015-2016 Global Competitiveness Index, ranking 49th out of 140 countries surveyed while placing first for strength of auditing and reporting standards as well as financing through local equity market, and 12th for financial market development.
  • South Africa is ranked 73rd out of 189 countries for ease of doing business according to Doing Business 2015, a joint publication of the World Bank and the International Finance Corporation.
  • In December 2015, Fitch Ratings downgraded South Africa’s long-term foreign and local currency Issuer Default Rating to “BBB-” from “BBB” and to “BBB” from “BBB+”, respectively, and said the outlooks were stable. The issue ratings on South Africa’s senior unsecured foreign and local currency bonds were also downgraded to “BBB-” from “BBB” and “BBB” from “BBB+”, respectively. It said key drivers for the rating decision included further weakening of GDP growth performance and estimates of growth potential. There had also been additional delays to the availability of new electricity generation capacity. However, Fitch also said electricity constraints had eased somewhat, that the banking system was strong and that the structure of government debt was highly favourable.
  • Also in December 2015, Standard & Poor’s credit ratings agency revised the outlook on the South Africa to negative from stable, although it affirmed the long- and short-term foreign currency sovereign credit ratings on South Africa at “BBB-/A-3”; it also affirmed the “BBB+/A-2” long- and short-term local currency ratings. The agency said the negative outlook reflected its view that GDP growth might be lower than it expected, for instance, as a result of persistent electricity shortages, continued weak business confidence, or labour disputes escalating again. In June, S&P acknowledged that South Africa had several strengths, including broad political and institutional stability, policy continuity, and fiscal prudence, which would help to contain the country’s fiscal and external balances and deep financial markets.

“While S&P noted that growth in 2015 would be limited as a result of electricity supply shortages, the agency said it expected growth to increase over 2016 to 2018 as electricity supply, domestic consumption and net exports improved. [The] government has committed to redouble the efforts to deal with the challenges identified by S&P,” the Treasury said in response.

Updated December 2015

Sources:

Would you like to use this article in your publication or on your website? See Using Brand South Africa material.

RELATED ARTICLESMORE FROM AUTHOR