Strenghts and Weaknesses of the South African Economy

In some ways South Africa is like all other countries, in other ways it is like some others, and in its own, unique way it is like no other country. It is subject to the same environmental and ecological threats as all other countries on this earth, it is caught up in the realities of a globalising economy and it is adapting to rapidly changing production, service and information technologies. South Africa shares many features with more advanced economies in that it has a well-developed physical infrastructure, an advanced banking and financial sector and a manufacturing sector that can produce varied and sophisticated products.

It also shares features with the poorest nations: an under-educated and under-skilled population relative to the requirements of an advanced economy, large-scale unemployment negatively affected by economic globalisation patterns, and local communities lacking modern economic, social and infrastructural facilities. Yet in some ways South Africa is like no other nation. South Africa has a historical pattern which has determined a current reality which must be understood if we are to find effective solutions for its current malaise.

It has a complex problem structure with a unique mix of human and physical resources which contribute to both its strengths and its weaknesses. South Africa has some significant positive features such as its well developed and diversified economy and infra-structure, and the universal global goodwill towards the current government. The country has an attractive climate, great tourist potential and bountiful mineral resources. It has a heterogeneous population mix which has emerged peacefully from an apartheid regime to a fully democratic government. But there are also many serious negatives.

The country has a dual social and economic structure with a minority of the population living according to the pattern of a ‘First World’ economy and the majority living according to degraded ‘Third-World’ standards or in socially and economically marginalised ‘Fourth World’ conditions. Over the past quarter century South Africa has experienced economic (GDP) growth rates which have consistently fallen below the population growth rate. This has resulted in a persistent trend towards economic impoverishment. This trend has gone hand in hand with even slower employment growth and more recently a rapid decline n employment opportunities in the formal economy.

The steep rise in criminality in the country is directly correlated with these circumstances. If we are to get the nation back to health and towards a sustainable future it is important to take a look at the historical roots and structure of South Africa’s current disease. We cannot accept simplistic ideological solutions designed for other times and other countries. Strengths South Africa is the economic powerhouse of Africa, with a gross domestic product (GDP) four times that of its southern African neighbours and comprising around 25% of the entire continent’s GDP.

The country leads the continent in industrial output (40% of total output) and mineral production (45%) and generates most of Africa’s electricity (over 50%). Its major strengths include its physical and economic infrastructure, natural mineral and metal resources, a growing manufacturing sector, and strong growth potential in the tourism, higher value-added manufacturing and service industries. South African banking regulations rank with the best in the world. The sector has long been rated among the top 10 globally.

There are 55 locally controlled banks, 12 foreign-controlled banks and five mutual banks. Some of the world’s leading institutions have announced their intention to enter the local banking sector through mergers and acquisitions. The JSE Limited is the 18th largest exchange in the world by market capitalisation (some R3. 3-trillion as of September 2005). The JSE’s rules and their enforcement are based on global best practice, while the JSE’s automated trading, settlement, transfer and registration systems are the equal of any in the world.

Four main metropolitan areas dominate economic activity within the country: Johannesburg and its surrounds (Gauteng province), the coastal Durban/Pinetown areas (KwaZulu-Natal), the Cape Peninsula (which includes Cape Town), and the Eastern Cape’s Port Elizabeth/Uitenhage area. The financial and industrial sectors are concentrated in Gauteng province, which on its own accounts for over 30% of the country’s GDP. Economic growth South Africa’s economy has been in an upward phase of the business cycle since September 1999 – the longest period of economic expansion in the country’s recorded history.

During this upswing – from September 1999 through to June 2005 – the annual economic growth rate averaged 3. 5%. In the decade prior to 1994, economic growth averaged less than 1% a year. According to the South African Reserve Bank, there is no sign of this period of expansion coming to an end. Gross domestic product (GDP) growth was running at an annualised 4. 8% in the second quarter of 2005 (compared to 3. 7% in 2004 and 2. 8% in 2003). Consumer inflation has been on a downward trend since 2002, when consumer prices increased to an average 9. 3% following the September 11 tragedy in New York.

Consumer inflation averaged 6. % in 2003 and 4. 3% in 2004 – compared to 9. 8% in 1994. At the same time, prudent fiscal management has seen South Africa’s budget deficit come down from 5. 1% of GDP in 1994 to 2. 3% of GDP in 2004. In the first quarter of 2005, this figure fell to 1. 6%, with the SA Revenue Service collecting nearly US$3. 5-billion more than expected. The source of the revenue windfall was not higher individual or corporate taxes – both have fallen since 1994 – but the performance of the econony, consumer confidence, and a dramatic increase in the number of registered taxpayers, from 2-million in 1994 to more than 5-million in 2004.

Investment ratings South Africa was rated the most competitive economy in the sub-Saharan region and the most attractive country in Africa to invest in by the World Economic Forum’s 2004 annual Global Competitiveness Index. A decade of comprehensive institutional reform and sound economic management have also been rewarded with solid credit ratings, implying less risk for investors and cutting the cost of capital for the country’s public and private sector borrowers.

In August 2005, Standard ; Poor’s raised South Africa’s long-term foreign currency credit rating, citing the country’s improved economic stability, reduced vulnerability to external shocks, a moderate debt burden, and strong and stable political institutions. The agency upgraded SA’s long-term foreign currency sovereign rating from BBB to BBB+ – equal to that of Poland and Thailand, and a notch above Mexico – and the local currency rating from A to A+. Rival agency Fitch had South Africa on a positive ratings watch at the time, while Moody’s, the third big ratings agency, upgraded SA’s credit rating in January 2005.

The upgrade reflects South Africa’s strong track record of macro-economic management and improved prospects of sustainable higher GDP growth rates,” Standard & Poor’s said. Challenges The International Monetary Fund (IMF), in its 2005 annual country assessment, commends South Africa’s authorities for the remarkable economic progress achieved since democracy in 1994. “The economy is now growing strongly, inflation has been lowered and has become more predictable, public finances have been strengthened, and the external position has improved markedly,” the IMF said. “The expansion in economic activity has created additional jobs.

Given South Africa’s position in the region, the country’s strong economic performance has benefited the rest of Africa. ” At the same time, the IMF’s directors noted that serious economic challenges remain: persistent high unemployment, poverty, large wealth disparities and a high incidence of HIV/Aids. But they came out in support of the SA authorities’ approach to these problems, with policies aimed at raising economic growth in a stable economic environment and initiatives to reduce unemployment and improve social conditions. The IMF said this strategy could be bolstered by labour market reforms and further trade liberalisation.

Key to overcoming the challenges identified by the IMF will be the economic integration of South Africa’s previously disadvantaged majority. South Africa’s economy has a marked duality, with a sophisticated financial and industrial economy having developed alongside an underdeveloped informal economy. While SA’s financial and industrial “first economy” has an established infrastructure and economic base with great potential for further growth and development, its informal “second economy” presents both untapped potential and a developmental challenge for the country.

South African business expectations for growth in key areas such as turnover, profitability and employment are higher than ever before, according to the latest International Business Report by consultants Grant Thornton. Releasing the 2007 International Business Report – previously known as the International Business Owners Survey – on Wednesday, Grant Thornton said in a statement that 82% of medium to large privately held businesses in the country expect an increase in turnover for 2007, up from 71% in 2006.

Sixty-two percent expect to increase their profitability (up from 54% in 2006), the survey found, while 22% expect to grow their exports (up from 18% in 2006). The biggest jump in expectations was for growth in employment, from 32% who expected to employ more staff in 2006 to 53% in 2007. Fifty-nine percent of companies surveyed said they would be investing more in plant and machinery in 2007, up from 48% in 2006. The only indicator where expectations dipped was for investment in new buildings, with 30% saying they would be increasing their investment this year, down from 33% last year.

Seventh most optimistic country At the same time, Grant Thornton reported that South African business optimism had dropped from 2006, with 74% of companies saying they were optimistic about the year ahead compared to 80% last year. However, this still left South Africa as the seventh most optimistic of the 32 countries surveyed – and well ahead of the global optimism average of 45%. Grant Thornton attributed this “anomaly of lower than usual optimism during a business boom” to non-business factors such as increased crime and political uncertainty regarding the succession in South Africa’s presidency.

Neil Higgs, director of Research Surveys, which conducted Grant Thornton’s Sout Africa research, said there had been a drop in overall confidence measures during the middle to latter part of 2006, due to concerns over softer exchange rates, rising interest rates and fuel price increases, exacerbated by these non-business concerns. However, Research Surveys “had noted an improvement as the year closed, signalling better prospects for 2007.

The South African government is committed to providing facilities and opportunities to communities disadvantaged by the pre-1994 apartheid system, and to enabling those communities to share equitably in the resources of the country and its economy. The government’s macro-economic Growth, Employment and Redistribution (Gear) strategy is, at the same time, based on promotion of the free market and financial and fiscal discipline, aiming at economic growth, job creation and provision of basic services to all South Africans.

The government has underlined the importance it attaches to investment by introducing measures to enhance and support trade and industrial development. The government is also promoting the development of small businesses. The National Small Business Act provides a mechanism to review the impact of proposed legislation on small businesses. It is also the enabling legislation for the Ntsika Enterprise Promotion Agency and National Small Business Council.

The National Economic Development and Labour Council (Nedlac) facilitates discussions to reach consensus between government, business and organised labour on issues affecting the economy. Business organisations such as the Chamber of Mines, the SA Chamber of Business, the South African Foundation, and foreign chambers of commerce in South Africa regularly liase with government and comment on draft legislation.