Economic Watch

State of SA economy: reason for pride or despair?

African Economic Outlook
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A dispassionate look at the commentary on the state of the South African economy raises the question: Should one be proud or fall into despair?

A report, just released, on the economic outlook for Africa (AEO), compiled by the African Development Bank, the Organisation for Economic Cooperation and Development’s  Development Centre and the United Nations Development Programme clearly illustrates this dilemma.

It reflects how the sluggish South African economic growth is “reducing overall growth in sub-Saharan Africa by about three-quarters of a percentage point” – pulling it down from a potential 6.2% to 5.2%.

At the same time it also reflects the fact that South Africa wears the crown of champion on the continent in terms of foreign direct investment (FDI), attracting 85% of all FDI into Africa.

How complicated accurate judgement becomes, is revealed when one also reads an article by University of the Witwatersrand professor of economics, Uma Kollamparambil, last week, stating: “South Africa’s economy has become increasingly vulnerable to the sale in large numbers of government bonds and other financial investments by foreign investors ...”

Are the high levels of FDI into South Africa and large amounts of foreign-held domestic debt a case of foreign investors seeing something in the South African economy that the doom-dominated domestic commentators do not?

Can it be described as an outcome of fundamental strengths in the South African economy that it is ranked top of the log of the easiest countries in Africa to do business in, and that it has a world-ranked financial service industry?

Is the vulnerability Kollamparambil writes about due to a fundamental weakness or merely a case of “uneasy lies the head that wears a crown”, as Shakespeare wrote in his 1597 play, Henry IV – in short a mixed blessing?

What South Africa got right and wrong

Across the board, among both local and international commentators, there is consensus that on the domestic front factors like the electricity supply crisis and an expensive, volatile and rigid labour market pose serious threats to the country’s economy.

Less explicit, although distillable from general analysis, is that in terms of diversification of its economic base, South Africa, at least as far as the rest of the continent is concerned, is moving in the right direction.

The AEO report is upbeat about economic growth prospects in Africa in general (South African companies are the leading investors on the continent). When it, however, comes to the subject of the South African currency, the rand, things becomes a lot greyer.

The AEO report states that “South Africa’s growth is projected to recover gradually on the back of more buoyant export markets and improved competitiveness due to the large depreciation of the rand.” (Our emphasis.)

Kollamparambil goes the other way on this subject, based on fears that the capital inflows into the country might turn around. He writes: “A sudden and sharp reversal of these flows into South Africa could lead to the further weakening of the rand, which has already declined by 43% in the last three years. This in turn would mean an increase in the rand value of the debt South Africa owes to the rest of the world.”

Biggest threat

There is plenty of advice floating around between analysts, academics, think tanks, institutions and commentators about what governments, including the South African government, should do to secure sustainable economic growth and to fortify against or minimise the impact of economic threats, of which shocks to the global financial systems top the list.

However, the most dangerous threat is the toxic mix between high global levels of debt (286% of the collective global GDP) and unsustainably low interest rates, a threat over which only one government – the United States – has some measure of control in the short to medium term.

In the words of Kollamparambil this threat will be turned into reality “by the withdrawal of the financial support the US Federal Reserve has been injecting into the US financial markets since 2009”.

When this happens, interest rates in the US will rise substantially, forcing central banks around the globe to follow suit. And this possibility might not even be a medium-term prospect, with many analysts expecting it to happen by the end of this year.

by Piet Coetzer

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