Lee-Roy Chetty
Lee-Roy Chetty

South Africa 2013

South Africa’s potential growth has slowed over the last few years.

Considerable efforts will be needed to meet the Government’s goal of raising per capita income and to create 11 million new jobs by 2030. Moreover, inequality continues to be unacceptably high, suggesting that making growth more inclusive remains an important policy challenge.

Our government has diagnosed the key constraints to raising potential growth and recognise the need for deep-rooted structural reforms.

The key strategic output of the required reforms must seek to raise the share of private investment, including ‘green growth’ technologies as well as continuing to improve the level of education and skills in order to raise productivity levels closer to those of other emerging market countries.

Towards this end, the required policy reforms must envisage improvements in governance and inclusiveness, promoting catalytic investment projects – focusing on high value-added manufacturing and services sectors – as well as broader economic reforms to raise incomes of the poorest households and reform public finances to ensure their sustainability and remove distortions.

The New Growth Path (NGP) and the National Development Plan (NDP) support the government’s long-term goal of building a harmonious and prosperous society through livelihood improvement, and regionally balanced and environmentally sustainable growth.

The reforms mapped out in these two government ministries will be carried out to stem rising income inequality, address structural imbalances, and further open up the economy.

Public expenditure will be geared towards livelihood improvement, and strong support will be provided to education, healthcare, social security and public housing. Infrastructure remains a high priority with an emphasis on promoting rural development and emerging strategic industries, in particular modern clean energy and environment-friendly technologies, while piloting development of green and low-carbon cities. Resource conservation to combat climate change and improve natural resource management also remains a priority for government.

In terms of our country’s recent economic developments and outlook, economic activity is easing. Following the rebound in 2010, private consumption growth has remained strong through the third quarter of 2012 giving robust employment and wage growth. Manufacturing export growth has weakened, although commodity exports have nevertheless continued to grow at a healthy pace.

The output gap has widened slightly but inflation remained contained. This reflects the timely monetary policy tightening that began in 2010 and the easing of temporary supply side factors which had increased headline inflation up in the middle of 2011. Core inflation rose modestly, reaching 4.6% in May 2012, reflecting the recovery in domestic demand.

South Africa’s monetary policy stance has correctly balanced the risks to growth and inflation. Headline inflation is projected to ease towards the end of 2012 and the start of 2013 as domestic demand moderates.

As a result, policy rates should be maintained around current levels, but should be eased if growth prospects worsen significantly. Government should continue to allow two way flexibility of the exchange rate to allow the currency to move in line with fundamentals, while limiting intervention to smooth out excess volatility.

Notwithstanding the weakening environment, our country’s external position remains strong.

The real effective exchange rate remained broadly stable in the year through July 2012 before the recent episode of market volatility, and the current account surplus is expected to have remained roughly constant in 2012, heading in to 2013. This reflects stronger commodity exports being offset by robust consumption and capital goods imports.

South Africa’s fiscal policy continues to be counter-cyclical in support of growth and employment given the continued weakness in global markets. Barring significant spending shortfalls at the sub-national level due to capacity constraints, our country will likely miss the fiscal deficit target of 4.6% of GDP for 2012.

Government spending on wages is projected to be higher by 7% compared to the budget reflecting recent agreements with the unions. This is not offset by revenues which are estimated to grow in line with the budget at 27.4% of GDP.

Financial market volatility has also risen alongside higher global risk aversion.

Capital flows were robust through the first half of 2012 led by portfolio bond inflows. However, foreign investors subsequently scaled back their exposures, mainly in equity markets and Government securities, prompting a Rand depreciation of around 8% against the U.S. dollar since the beginning of 2012.

The risks to growth in South Africa over the medium term are tilted to the downside.

While a softening in activity is envisaged in 2013, the risks of a sharper slowdown are substantial if the Eurozone crisis continues to deepen. There is enough scope for monetary policy to be eased if the growth outlook weakens substantially, but fiscal space is more limited.

Domestic downside risks include the potential that households will be unable to sustain their consumption growth due to high levels of indebtedness, and that credit quality may decline with income. This could be exacerbated by a tightening of financing conditions. If downside risks materialise, temporary expenditure measures could be put in place but would need to be solidly framed within a credible medium-term consolidation plan.

On the upside, a swift and decisive resolution of the crisis in Europe as well as faster growth in other major advanced economies would increase South African exports.

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    • Economist

      Some basic problems – a growing deficit. Income has dropped only slightly, but government spending is up a massive 22% year on year. Trade deficit – SA exports down, and imports are up. Remedy – cut government spending. Public sector salaries are inflated and the state is spending too much on the wrong things – salaries and consumption, and too little on investment. Get the parastatals out of the economy – break them up and sell them. They are driving inflation and inefficiency and just adding costs to the remaining productive parts of the economy. Above all – fix the state. The state is too big, bloated and inefficient. SA needs a small New Zealand type government – small, lean, efficient and productive.

    • Lennon

      Perhaps we should’ve protected local industry and “consumers” instead of letting it implode under the weight of Friedman-styled economics.

      The Credit Act is a step in the right direction, but it might also help to inform “consumers” that a credit-based “lifestyle” is idiotic.

    • The Creator

      So much ignorance, apparent stupidity, and misrepresentation, so little time.

      South Africa’s “potential growth” has not slowed. South Africa’s GROWTH has slowed, due to a lack of productive investment and a concentration of wealth in the hands of the ruling class.

      The government has not “diagnosed the key constraints”. It has ignored the key constraints and hired a bunch of failed businesspeople to deliver a load of corporate gobbledygook called the National Plan and the New Growth Path, none of which has provided any ideas for improving the growth rate, and no new ideas have been presented by anyone else. Hence the effort to pretend that the problem lies in education.

      There is no sign that anyone in this government wants to “stem” rising income inequality. They talk about it a lot, but they do nothing to discourage it.

      In addition, although the official inflation rate is supposedly low, the actual inflation rate may be considerably higher.

      Our country’s external position is very poor. Our national debt has doubled in the last four years and looks set to exceed 100% of GDP by the end of the decade. Our trade balance is consistently negative and we are thus spending more than we are earning internationally as well as domestically. This helps to explain our collapsing credit ratings and the rapid fall in the value of the currency — which we cannot exploit, as we don’t make or extract enough to increase our exports.

    • Economist

      The Creator makes a good point – the misery index = unemployment + inflation, which puts SA high on the misery index among nations. Creator is right that the real inflation rate is MUCH higher than the official rate – which is one of the main reasons for all the riots, strikes and Marikana type disasters recently. Simply – very high inflation makes life hell if you live on a social grant, workers wage or even on nothing. The problem I have is the government really couldn’t care less about inflation – many of their policies, especially the dreadful costs created by useless parastatals – are quite deliberately increasing inflation. If inflation were killed off, the real standard of living, even of the poorest, would improve radically.

    • Keynes

      SA requires a growth rate of 8% to make a meaningful dent in unemployment. The last time this was seen was in the 60’s which were a decade of massive growth, industrialisation, investment and development, despite an appalling and dreadful political system that excluded the majority of people from the economy. The problem is that current ANC policies are more likely to shrink the economy than to grow it. Latest ANC thinking – ignore the ratings downgrades as being unimportant, although SA depends entirely on foreign funding to cover its massive deficit and capital shortage, and the solution to the mining crisis – tax the mines more. Both policies are frankly ridiculous – more tax is just diverting money from the productive to the consumptive side of the economy. The policies show a mindset of rent-seeking, or an extractive, coercive government trying to get growth by extracting resources. The rest of Africa has moved away from this thinking, after the disasters it has brought. Until this mindset changes, SA will experience negative growth and greater misery.

    • Juju Esq.

      Thanks Lee-Roy. Interesting analysis. While there are some concerns, based on the global economy, i.e. European and US downturns etc. South Africa has not fared too badly.

    • Juju Esq.

      Regarding the comments on Lee-Roy’s analysis, arm-chair economists are as bad as arm-chair rugby players. They sit and shout advise at people who are chosen to play due to their expertise, skill and professionalism, yet the arm-chair fellows always think they know better, even though they do not have a chance in a million of playing for the National squad.