South Africa

Uncomfortably numb

Country Rating B2

Strengths

  • Natural resource base includes gold, platinum, chrome, manganese, vanadium, coal and diamonds.
  • Geographic (strategic) and economic size engender regional dominance.
  • Judicial and business environments aligned with western ‘norms’.
  • Economic management (monetary & fiscal policy) has a sound track record.
  • Exemplary exodus from foreign debt problems in the 1990s.
  • Good relations with IFIs and assistance would be readily available, in need.

Weaknesses

  • Long-term structural problems include unemployment, rural poverty, skewed incomes, incidence of HIV/AIDS, labour
  • militancy and weak educational standards.
  • Open economy can result in currency and external account pressures.
  • Despite lower dependence on mining (now accounting for around 13% of GDP), vulnerability to commodity price fluctuations.
  • Current and fiscal account deficits.
  • Inward investment weighted to portfolio flows rather than FDI.
  • Lack of investment in power generation has resulted in some rationing of supplies to homes and industry.

 

Economic Overview 

 

Stagnation per se

 

South African GDP per capita stalled for almost three years. Expected growth for 2017 (+1%) and 2018 (+1.5%) will not be enough to deliver fresh per capita income growth. It created some discontent and contributed to private confidence (business as well as consumer one) slump. The trigger of this slow growth momentum was the decision of Chinese authorities to let growth slow in 2011. It implied less demand for metals, a fall in metal prices (key South African export) and a related depreciation of the rand exchange rate (-46% from 2011 to date).

 

Recent political evolutions didn’t show any sign of solutions in order to break this stagnation. Public debt is growing but from a low starting point. It means that financing is not a big issue, so the government has no incentives to rebalance its public balance. Such a model, with a level of public spending somewhat high for the region (about 40% of GDP) does not give the right incentives to the private sector. National savings are only 16% of GDP, not enough to finance investment and fix the bottlenecks inhibiting South African growth (particularly regular power shortages). Policy slippage is likely until the next Presidential election in 2019.

 

But the economy is diversified…

Dependence on the gold sector is much reduced, with mining as a whole now accounts for around 13% of GDP, just like manufacturing. Platinum and coal are both larger contributors to mining output than gold. Recent economic performance shows also some resilience in the domestic economy. GDP growth was +0.3% in 2016, the weakest growth since the 2009 World crisis. However, the South African economy exhibited a divergence between weak primary sectors and services. Agricultural production decreased for the 2nd year in a row (-7.8% in 2016, -6.1% in 2015), as a result of a bad harvest. Moreover, the mining output decreased by -4.7%, subtracting 0.4pp to overall GDP growth. Services sectors (63% GDP) performance remained quite unchanged, growing by +1.4% in 2016, after +1.6% in 2015. It means that even if the commodity sector weighs on South Africa’s economic performance, other sectors still benefit from other drivers to grow (wage indexation).

 

…and has buffers

The Central Bank (CB) is clearly an asset. The floating exchange rate regime offers some self-insurance against shocks. The exchange rate plays a shock absorber role and reduces the need for foreign exchange reserves: their current level is adequate.

 

Last review: 2017-21-09