South Africa Economy

8/8/2019 South Africa Economy

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The economy ofSouth Africa has a two tiered economy; one rivaling otherdeveloped countries and theother with only the most basicinfrastructure. It is therefore a productive and industrialised economy thatexhibits many characteristics associated with developing countries, including a division of labour betweenformal and informal sectors and an uneven distribution of wealth and income. The primary sector, basedon manufacturing, services, mining, and agriculture, is well developed.

The South African economy is in a healthy state and indications are that this will besustained for the foreseeable future. Annual growth rates of 6% are being predicted -something that is almost unheard of in our country. These growth rates can be achievedthrough the commitment of both public and private sectors. In this context, the newNational Freight Logistics Strategy, published recently by the Department of Transport,mustbe welcomed. This positive step towards establishing an efficient national logisticsinfrastructure is essential in supporting national developmental strategies. There is no doubtthat the growth challenges are going to be dependent on how well the overall logisticsinfrastructure can cope with the demands placed on it and how well it will be able tosupport the envisaged growth. The South African industry needs to strive towardsworldclasssupply chains within the country, but especially when operating in the global market.

South Africa is a country of vast potential whose economy is only just beginning to crawl out

of four years of recession. The recession capped a decade-long stagnation resulting from

global recession, loss of business confidence, double-digit inflation, global economic

sanctions, structural inefficiencies, and irrational economic policies rooted in apartheid.

Calculation of road tonnages

The CTO yearbooks are compendiums of traffic information obtained at CTO stations onprimary roads, highlighting traffic characteristics. The CTO stations are placed on selectedlinks of the national and primary road network. To obtain trends since deregulation, data for

1990, 1993, 1997 and 2003 was analysed the number of CTO stations per year is shown inTable 2.Year Number of stations1990 3441993 3671997 2362003 6222004 720Table 2: Number of CTO stations per year analysed

Political Situation In South Africa

It does not take a rocket scientist to predict the outcome of that election, at least in broadstrokes. The ruling ANC will defend its outright majority. A little more interesting is thequestion whether the ANC will gain a two third majority in parliament, which is necessary tochange the constitution. As a growing number of black South Africans appear to be gettingdisenchanted with the ruling party, they may abstain from voting and thus prevent a twothird majority for the ANC in parliament.


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The South African Economy

The economic situation in South Africa appears to be as ambiguous as the political situation.Even in the old days South Africa did not enjoy a reputation for being a country with lowtaxation and a truly deregulated business environment. Things seemed to improve a littleafter the first democratic election. Perhaps not very surprisingly, the ANC dumped the n

word (nationalization) and embarked instead on a cautious course with the p word(privatization). It included a little of South African Airways here and a little more of Telkomthere.

However, during the past few years, the trend has been gradually changing. South AfricanAirways is under government control again. Even though the n word is nowhere explicitlymentioned, it has effectively returned. Mineral rights and water rights have beennationalized. When nationalization is not feasible, other sorts of control are being imposed.For example, commercial websites are going to have to be registered. As the special editionof The Economist The World in 2004 points out, because of black empowerment themining, energy and financial sectors already have charters, which define how much capitalshould go to non whites.

Putting all this into context historically and geographically we may be reminded ofdevelopments in other African countries, whose economic policies led them straight to theeconomic rubbish bin. It looks as if the new leadership in South Africa may have to learn afew economic lessons the hard way. The consequences of these trends are alreadyunfolding. The number of stocks on the Johannesburg Securities Exchange is tanking.Professionals continue the chicken run. Chicken run is a term in South Africa for peoplewho leave the country permanently. South African corporates make an effort to expand outof South Africa, where the business environment is less regulated.

On the other hand, the South African economy may at least indirectly benefit frominternational economic developments. While the US dollar is cratering, the three golds realgold, black gold (crude oil) and protein gold (soybeans) have been recently the bestperforming investments. It looks as if (real) gold is in the process of becoming the next biginvestment theme, which contrarian investment advisors have been predicting for quitesome time already. As South Africa produces a significant amount of gold, its economy andespecially the gold mining industry there may benefit from that new investment theme.

Moreover, R.E. McMaster notes in the lead article ofThe Reaper last November thatcommodity currencies have been the rage. By commodity currencies he primarily meansthe Canadian, Australian and New Zealand dollars. To a certain degree, the South AfricanRand is also a commodity currency. However, in my humble opinion, it is not a good idea toinclude the Rand into that category with the three dollars. There are too many particularitiesthat justify to deal with the Rand separately. They may be summarized with TAB. ThatsAfrica, Baby. Anyway, assuming that the gold price is indeed climbing to the stars, South

Africas economy may benefit from it, no matter whether or not the Rand should beconsidered a commodity currency.

After several years of sustained growth, for the first time since 1992 South Africas economy fell into recession with

GDP contracting by 1.8% in 2009. The economic slowdown had started already in 2008 with the weakening of


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domestic demand and was exacerbated when the global crisis led to a sharp fall in exports. Growth is expected to

recover gradually to 2.4% in 2010, helped by the recovery of global demand and boosted by the FIFA World Cup, and

to accelerate further in 2011 to 3.3%.

Output in manufacturing and mining declined in 2009 as a result of lower exports and agriculture contracted because

of adverse climatic conditions. The only sector that showed sustained growth was construction, boosted by a public

investment programme and by the forthcoming football World Cup.Thanks to its prudent macroeconomic policies, South Africa was one of the few countries on the continent able to

implement strong and coordinated countercyclical fiscal and monetary policies. Fiscal stimulus measures together

with cyclical revenue shortfalls resulted in a sharp deterioration of the fiscal position by 6.2 percentage points of GDP,

culminating in a deficit 7.3% of GDP in 2009/10. The Central Bank responded to the recession by cutting the repo

rate by 500 base points. Weak demand and the appreciation of the currency helped reduce inflation from its peak of

11.5% in 2008 to 7.1% in 2009. A sharp increase in electricity prices and wage cost pressures prevented a further

decline of inflation into the target range of 3-6%. This made the trade-off between fighting the recession and

achieving low inflation more delicate, causing public debate over the mandate of the Bank. Inflation is expected to

decrease in 2010, falling back into the target range.

In the coming years, the main policy challenge will be to strike a good balance between fostering growth, while

preserving fiscal sustainability and low inflation.

South Africas economic and social outlook remains shadowed by huge structural challenges, notably deficiencies in

transport and energy infrastructure, which raise production costs and limit growth potential. Public service delivery,also a severe bottleneck to growth, has proven inadequate in a period of severe economic distress and has led to

significant social discontent. Demonstrations took place throughout 2009 and if the government fails to improve basic

service delivery social instability could continue.

President Zuma, elected in April 2009, must achieve a delicate balancing act: reassuring the international and

domestic business community by upholding market friendly policies, while delivering on his promises to alleviate

poverty, against a backdrop of sharply increased unemployment.

Public resource mobilisation has improved, as shown by the rising number of registered taxpayers, both individuals

and corporations. However, the recession resulted in significant revenue shortfalls in 2009. Further simplification of

the tax code and of filing procedures will meet business expectations and free staff within the tax administration to

strengthen auditing in sectors where evasion is still widespread. Here again, voter satisfaction with public service

delivery must be improved in order to broaden and strengthen the direct tax base and to increase its contribution to

public financing.

A Consumer View of the Current Economic Situation

When consumers read headlines like The South African Banks latest quarterly bulletin indicates thatthe countrys outlook is deteriorating rapidly they turn to the sport pages in search of some goodnews. In this article we provide a consumer summary of the current economic situation and somepractical advice for 2009.Consumers are bombarded with economic statements that have very little practical meaning:The change in consumer behaviour reduced the ratio of household debt to disposable income by 75.3percent.

The widening in the current account deficit in the third quarter, to 7.9 percent of gross domesticproduct from 7.3 percent in the second quarter, could persuade the MPC to keep the bank's officialrepo rate at 12 percent to support the Rand.The current account deficit has been financed comfortably by inflows on the financial account since itemerged in 2003, but the problems in global financial markets make this source of funding lessreliable than in the past.


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The depreciation in the local currency makes imported goods more expensive, putting upwardpressure on inflation, which topped 12 percent in October.Economic growth was sustained in the third quarter by government consumption spending, which rose9.6 percent; and growth in capital spending by both the government and the private sector, whichrose 10 percent.

Household consumption fell in the third quarter - for the first time since the fourth quarter of 1998 -by nearly 1 percent.

The South African economy has grown well over the last seven years. Consumers benefited from this

growth period. Jobs were not difficult to find and salary increases were slightly higher than the

inflation rate. The effect of this was that consumers started to believe that they were better off and

this in turn made them more confident about the future.

Then in 2008 a number of things happened. The global economic crises caught most people by

surprise and shocked world economic systems. The cost of living increased by more than 15 percentand the average salary increase was substantially lower than the increase in the cost of living. Add tothis the 10 consecutive interest rate increases and all of a sudden, consumers monthly budget wasunder pressure.This resulted in many consumers falling into arrears. There are currently 17.17 million creditactive consumers and 6.79 million consumers or 40 percent are currently more than two months inarrears. This is why so many credit providers reported a substantial increase in bad debt.All this action shocked consumers into action. They stopped applying for new loans and reducedspending where possible. Less money was spent of food and clothes. Plans for holidays were amendedand consumers refrained from buying big ticket items.In a matter of months consumers became less optimistic about the future and many consumers arenow pessimistic about 2009. Added to this more and more companies started to reduce jobs.Internationally governments introduced massive rescue packages. All of a sudden the world recessionis mentioned by more and more people although this is not strictly true for South Africa.

In 2009 you can expect the following:

International and local sales could decline.

This will force companies to reduce jobs and they will spend less on investments.

The SA Government will continue to spend money on infrastructure development

and consumers linked to this sector should be fine.

Uncertainty will continue to be in the air during next year and this could have an impact on exchange

rates.


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Exports may well decline and the reduction of international income could affect the trade balance of

the country. This means that it is more difficult for the Reserve Bank to balance the countrys bank

balance.

Share prices have reduced substantially during 2008 and it will take longer to recover.

Companies are normally first to take action. On the other hand consumers are slow to react. It is

however a fact that consumers will have to steer their own boat through the rough seas ahead. This

boat will be hit by a number of events - some positive and some negative.

On the positive side consumers can look forward to:

Interest rate cuts.

Lower inflation.

Lower fuel cost if the exchange rate does not deteriorate.

Retailers with unsold stock will offer reduced prices to sell goods.

It is expected that our economy will continue to grow.

Spending on infrastructure will have positive spin offs on tourism ahead of 2010.

On the negative side consumers can expect:

Reduction in the number of jobs.

Access to more credit will become more difficult.

Salary increases will be under pressure.

Consumers who are scheduled to go on retirement next year might find that the amount available for

pension is not enough.


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Your budget will continue to be tight and you will have less money to spend.

It might take many years for our economy and th

This is a chart of the trend of South Africa's gross domestic product at market prices estimated by

the International Monetary Fund with figures in millions ofSouth African rand

Year Gross Domestic Product US Dollar ExchangePer Capita Income

(as % of USA)

1980 62,730 0.77 Rand 22.55

1985 127,598 1.47 Rand 9.80

1990 289,816 2.58 Rand 13.09

1995 1,548,100 3.62 Rand 13.27

2000 922,148 6.93 Rand 8.58

2005 1,523,254 6.36 Rand 12.32

Inflation targeting and GDP growth

In the February 2000 Speech, the Minister of Finance, announced a policy ofinflation targeting, helping to

bring consumer inflation, which had been running in the double digits for over 20 years, under control.

Inflation declined from 6.9% in 1998 to less than 6.0% in 2000. The target was set to keep the South

African consumer price index (CPIX) a key indicator of inflation between 3% and 6% average per

annum. Although initially successful, the rand's rapid depreciation in late 2001 led to greater inflationary


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pressure and the South African Reserve Bank missed the target during the course of 2002, with inflation

coming in at an average of 9.3% for the year.

From September 2003 to 2005, however, the CPIX inflation rate has remained consistently within the

target range. The average annual rates of CPIX since 2001 were: 2001 - 6.6%, 2002 - 9.3%, 2003 - 6.8%,

2004 - 4.3%, 2005 - 4.3%.

Success in keeping inflation down allowed the Reserve Bank to reduce theprime lending rate that

determines the interest rate. During 2003 alone interest rates were cut by 550 basis points (5.5%), while

between 2002 and 2006 interest rates were cut by a total 650 basis points (6.5%).

The cut in interest rates saw consumer spending rise, the construction sector boom and the sale of new

vehicles reach record levels. This in turn generated much needed growth in gross domestic

product (GDP). Ironically enough, GDP growth started to gather steam just as the end of the GEAR

period neared. Since 1999, quarterly GDP growth has been consistently positive and annual GDP growthconsistently above 2%. Between 1996 and 2004, GDP growth averaged 3.1%, rising to 4.5% (based on

2005 market prices) in 2004.

Not all economist agree with inflation targeting and the dogmatic adherence to this policy in 2006 led an

successive increases in the prime lending rate that totalled 5.5%. These increases were in response to

rising consumers prices, but critically consumer prices increased due to external factors (20072008

world food price crisis and rising oil prices). No increase in the prime lending rate could counteract these

external factors and while inflation remained high the housing market and the motor manufacturing and

retail sector suffered heavy losses which in turn led to heavy job losses. Even though the prime lending

rate had returned to 2006 levels by mid-2009 amid the global Financial crisis of 20072010, it still

remains high at 7%. In 2009 the Nobel Prize winning economist Joseph Stiglitz warned South Africa that

inflation targeting should be a secondary concern amid the global financial crisis of 20072009.[17]

Although economic growth has improved, the growth has been largely jobless, and quicker growth is still

needed. The South African Government estimates that the economy must achieve growth at an average

of 4.5% until 2010 and 6% thereafter to reach its goal of halving South Africa's high levels of

unemployment, estimated at 26.5% (March 2005 - Stats SA), by 2014.

Macroeconomic trends in the world economy

In the wake of numerous challenges, the world economy is teetering on the brink of a severe global economic

downturn. The deepening credit crisis in major developed market economies, triggered by the continuing housing

slump, the declining value of the United States dollar vis--vis other major currencies, persisting global imbalances,and soaring oil and non-oil commodity prices all pose considerable risks to economic growth in both developed and

developing economies.


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Additionally, the unfolding food crisis, which is not only a grave humanitarian issue, but also aserious threat to social and political stability in some developing economies, endangers the achievement of the

millennium development goals (MDGs) by reversing some of the progress towards those goals made so far.In the face of these uncertainties, the growth of the world economy, which registered a rate of 3.8 per cent in

2007, is expected to decline markedly, to 1.8 and 2.1 per cent in the outlook for 2008 and 2009, respectively. The

prospects remain surrounded by much uncertainty. It is not clear whether the monetary and fiscal policy stimuliimplemented in the United States will take effect any time soon or whether more protracted problems in financial and

housing markets will push the major economy into a deeper recession with worldwide consequences. Based on conditionsof the second quarter of 2008, the baseline scenario seems the most probable of the three scenarios presented, with lesslikelihood of the occurrence of the better or worse outcomes that are presented in Table 1.

The baseline forecast projects a pace for world economic growth of 1.8 per cent in 2008, which is adownward adjustment from the baseline forecast of the World Economic Situation and Prospects 2008 published inJanuary, but close to the pessimistic scenario presented in that report.1The revision is informed by further deterioration inthe housing and financial sectors of the United States in the first quarter of 2008; this is expected to continue to be a majordrag for the world economy, extending into 2009. The contagion effects of the sub-prime mortgage market turmoil ondeveloping countries and economies in transition have so far been limited, but as the downturn in the United States

protracts, a more adverse impact should be expected and which would dim the prospects for reaching the MDGs by 2015.

A more benign outcome is possible, if the monetary and fiscal policy stimuli taken by the UnitedStates take effect in the course of 2008 by boosting consumer spending and restoring confidence in the

business and banking sector. In this case, the world economy is expected to experience a moderate slowdown

to 2.8 per cent in 2008 and a slight recovery in 2009 as growth improves to 2.9 per cent. In the pessimisticscenario, the world economy would slow to 0.8 per cent in 2008, followed by a sluggish recovery of 1.4 per

cent in 2009.

Growth of world output, baseline and optimistic scenarios, 2003-20092003 2004 2005 2006 2007 Baseline Optimistic

ScenarioPessimisticScenario

2

0

0

8

2

0

0

9

2

0

0

8

2009 2008 2009

WorldOutputGrowt

h

2.7 4.0 3.5 3.9 3.8 1.8 2.1 2.8 2.9 0.8 1.4

Developedeconomies

1.9 3.0 2.4 2.8 2.5 0.6 0.9 1.4 1.6 -0.3 0.7

UnitedStates

2.5 3.6 3.1 2.9 2.2 -0.2 0.2 1.0 1.2 -1.3 0.3

Eurozone

0.8 2.0 1.5 2.8 2.6 1.1 1.2 1.7 1.7 0.4 0.9

Japan 1.4 2.7 1.9 2.2 2.1 0.9 1.2 1.3 1.5 0.3 0.9Economies intransition

7.2 7.6 6.6 7.9 8.4 6.4 6.1 7.3 6.6 4.5 3.0

Develo

pingeconomies

5.2 7.0 6.7 7.1 7.3 5.0 4.8 6.3 6.0 3.5 3.3

Africa 4.6 5.0 5.3 5.6 5.8 4.9 4.6 6.2 6.1 2.2 1.1EastandSouthAsia

6.9 7.6 7.9 8.1 8.5 5.9 5.7 7.3 6.9 5.0 5.5

Western Asia

4.7 6.8 6.6 5.9 5.2 4.0 4.1 5.4 5.1 2.9 1.7


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LatinAmerica andtheCaribbean

2.2 6.2 4.8 5.7 5.7 3.1 2.6 4.2 4.0 -0.3 0.9

Memo:Leastdevelo

pedcountries

6.6 7.9 8.5 8.2 6.5 5.2 6.4 6.8 6.3 3.3 2.5

Worldtradegrowth(volume)

5.8 10.7 7.0 9.9 7.2 4.7 5.1 6.0 6.1 2.5 4.5

USdollarexchange-rateindex

(annualpercentagechange)

-12.3 -8.2 -1.9 -1.5 -5.6 -15.0 0.0 -10.0 2.0 -11.5 -9.2

Interest rateon 10-yearUSTreasurynotes

4.0 4.3 4.3 4.8 4.6 3.7 5.2 3.4 3.7 - -

United

Statescurrent-accountbalance(billionUSdollars)

-522 -640 -755 -811 -739 -636 -544 -666 -605 -562 -418

World Economic Situation and Prospects 2008 In other developed economies, growth in New Zealand

and Australia is expected to slow in 2008, owing to weaker consumer demand; while Canadas economicactivity is also expected to slow due to weaker external demand, impacted by the United States recession and

the appreciation of the Canadian dollar.

Regional outlookDeveloped economies


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In the baseline scenario, GDP in the United States is expected to contract by 3.5 per

cent in

2009 and to only recover to a meagre rate of 1 per cent in 2010, well below what is

needed

for recovery from the downturn. The slump in the housing sector that started in 2006

is still ongoing, while the credit crunch, asset price deflation and rising unemployment

underpin sharp retrenchment of business investment and household consumption. Policy

measures have been scaled up significantly in 2009, including a continuous expansion ofNicaragua and 7 per cent in Honduras in the absence of the crisis. For Brazil, Chile and Costa Rica,the required additional spending caused by the expected impact of the crisis would be between0.5 and 1.5 per cent of GDP per annum. Clearly, additional costs of this magnitude may stretchgovernment finances, lead to unsustainable increases in public debt and become a source of macroeconomicinstability in the future, if recovery and sustained growth do not set in swiftly.Further analysis shows that increased social spending would contribute to growthrecovery. However, countries would not return swiftly to pre-crisis levels of economic growth andemployment, as spending on Millennium Development Goal-related services represents relativelylow shares of aggregate demand in those countries (figure B). Stronger growth effects are likely toemerge over time as improved education and health outcomes underpin stronger productivitygrowth. The counter-cyclical response becomes much stronger if the Millennium DevelopmentGoal strategy is complemented by needed investments in public infrastructure. For a full recovery,however, other factors need to contribute as well, especially the resumption of external demand.This will require globally concerted stimulus measures to take effect.

Box 1 (contd)Average annual rate of growth in per cent0.0 1.0 2.0 3.0 4.0 5.0 6.0Costa RicaChileBrazilHondurasBoliviaNicaraguaCrisis baselineMDG plus infrastructureMDG strategyGap to full recovery

Figure B

Simulated countercyclical impact of increasedMDG spending on GDP growth, 2010-2015Source: Marco V. Snchezand Rob Vos (2009), ibid.

Update as of mid-2009 7

the balance sheet of the United States Federal Reserve Bank, a new fiscal stimulus

package

of $787 billion, and the Public-Private Investment Programme of more than $1 trillion to

dispose of non-performing bank assets. However, it will take time for these measures to

unclog the financial system and to restore economic growth. Uncertainties remain about

the effectiveness of these measures. With unemployment rising sharply and financial

deleveraging

continuing, the risk of the economy falling into a protracted deflation is stillincreasing. In the optimistic scenario in which things would fall into place by the third

quarter of 2009, the United States economy could recover in the second half of the year

and there would be post growth of about 1.5 per cent in 2010.

Japans economy is falling into a deep recession. The severe downturn in global

demand, particularly for automobiles, information technology and machinery, has led to a

collapse of Japanese exports, causing sharply falling corporate profits, tightening

financial


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conditions, rising unemployment, declining household wealth, and weakening domestic

demand. In response, the central bank reduced interest rates, along with a number of

other

measures, to stabilize financial markets and ease corporate financing. The Government has

adopted a series of fiscal stimulus packages, with additional government spending

totalling

about 5 per cent of GDP. In the outlook, GDP is expected to fall by 7.1 per cent in 2009.

A

mild recovery is possible in 2010, but this will be highly dependent on global recovery.

Western European economies have been hard hit by the crisis. GDP in the

euro area is expected to fall by 3.7 per cent in 2009, having registered 0.8 per cent

growth

in 2008. Despite the assumption that current fiscal and monetary stimuli gain some

traction

over the course of 2009, the European Union economies should expect no more

than a gradual stabilization of activity with an expected near zero growth in GDP in

2010. Economic woes differ across Western Europe, as countries face differing degrees of

exposure to downturns in housing markets, construction sectors, manufacturing exports

and banking sectors. Across the region, though, unemployment rates are surging and are

expected to continue to increase even after the decline in output has stopped. On

average,

the unemployment rate in the euro area is expected to increase to 10 per cent in 2009, up

from 7.5 per cent in 2008.

The economies of the new member States of the European Union have steadily

deteriorated in 2008, with growth entering negative territory in the Baltic States and

Hungary,

and declining to nearly zero in the other countries in the last quarter of 2008. The

sluggishness continued through the first half of 2009, reflected in double-digit declines

inindustrial production, a heavy drop in exports and retail trade and depressed consumer

and business confidence. While the recession in the 15 member States of the European

Union can be considered as the primary reason for this contraction, the region is also

affected

by the contagion effect of the global financial crisis causing sharply increased costs

of external borrowing and the sudden closure of access to international bank lending.

GDP of the new member States of the European Union is expected to shrink by 1.7 per

cent in 2009 and to recover modestly by 1.5 per cent in 2010. In a more pessimistic

scenario

of no global recovery, these countries should expect economic stagnation in 2010.

The economies of Australia, Canada and New Zealand are also expected toshrink in 2009, suffering from falling global demand and commodity prices. In Australia,

the unemployment rate is expected to jump from the 4.2 per cent of 2008 to over 6 per

cent in 2009, and to 8 per cent in 2010. In Canada, the rate is expected to surge to 9

per

cent in 2009. Despite fiscal and monetary stimuli, only a mild recovery is expected in

2010, however, mainly on the back of the moderate recovery of the global economy, if the

baseline conditions prevail

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South Africa Economy