Speech Given By Robert Tashima At The Launch Of The Report: South Africa 2012

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The Rainbow Nation, in many ways, is THE African economy. 

It dominates the continent, accounting for 25% of total GDP. It has easy access to global trade and capital flows. And in terms of market sophistication, it is head and shoulders above the rest of Africa. 

Even amongst the much broader portfolio of emerging economies that we at Oxford Business Group cover – which stretch from oil-rich Gulf monarchies to industrialised Asian giants – South Africa stands out as an example of a market built for growth.

Of course, that brings with it some perils. South Africa suffered significantly from the 2009 slowdown. This exacerbated structural problems, such as unemployment and inequality. 

As a result, talking about South Africa’s foreign investment appeal requires understanding the broader context. There are risks here that might put off the faint of heart – at least at first glance – but these must be measured up against the country’s intrinsic strengths.

The numbers provide an excellent example of how the positives weigh up against the negatives.

If we take a look, the republic is one of the few African countries to hold upper middle-income status, and has eked out a steady recovery from the contraction in 2009. GDP is forecast to grow at 2.7% this year, down from last year’s 3.1%, but still better than many G20 peers. 

As a result of the modest growth – and effective management by the Reserve Bank – inflation has held steady around 5% in recent years. This may be pressured by wage and utility rises, but the outlook is stable.

And while credit agencies might disagree, the rather large government budget is in fairly rude health as well. Despite muted growth forecasts, the deficit is expected to drop from 5.2% to 3.6% in the medium term.

Basic business measures look equally encouraging. Interest rates are low and it now takes only 19 days to start a business, roughly half of the continental average. 

However, overshadowing this good news are some pressing issues, the most urgent of which we all know is unemployment. Jobs were shed during the recession, but with nearly 24% of the working population unemployed, the problem is not cyclical; it is structural. And it is compounded by significant inequality, with South Africa’s gini coefficient one of the highest in the world.

These problems are concerning – no one questions that. But we would argue that it is not cause for despondency. The country benefits from a number of competitive advantages – fundamental strengths that are the envy of other African markets and afford South Africa the ability to grow its way out of trouble.

These assets could be man-made, such as targeted fiscal incentives, or they could be natural, such as the sizeable youth population. But we see four factors as truly enabling growth.

Perhaps the single biggest advantage that South Africa enjoys over the vast majority of its neighbours is that of stability – in terms of politics, and in terms of policy. South Africa has developed a deserved reputation for robust democracy and a comparatively high level of transparency – which is not always the case elsewhere.

The ongoing evolution of the country’s business environment is also a key asset. South Africa’s regulatory regimes are rated amongst the best in the world – particularly in the financial arena – with high levels of governance and robust buffers.

Similarly, natural resources are a huge blessing. South Africa’s enormous mineral reserves have underwritten large swathes of the country’s growth. This pays dividends not only in terms of raw material exports, but also in downstream, labour-intensive processing – providing inputs for everything from metalwork to chemicals.

Finally, while many of you might grumble about traffic on the roads or the rising cost of electricity, South Africa’s infrastructure – whether in telecoms, energy or transport – is impressive, particularly when compared to the rest of the continent. A peak hour traffic jam in Joburg? That’s a breezy Sunday drive in Lagos.

So it is in this context that we see four specific sectors that will define the country’s economic performance in the coming years. 

These select growth areas have the ability to propel the country’s economy forward at an exponential rate, particularly if initiatives such as IPAP2 and the Eskom investment campaign are executed effectively. They each offer not only opportunities for foreign capital, but also sizeable benefits for local firms looking to expand.

The first growth area comes as no surprise and for better of for worse, you can’t talk about South Africa’s economy without talking about mining. 

2011 was a bumpy year for miners and 2012 has proven similarly rough – thanks to work stoppages, ageing transport networks, even concern over carbon taxes – but the long-term appeal is still clear. 

The country boasts some of the world’s most valuable reserves, worth $2.5trn, and the sector directly contributes between 6 and 9% of GDP.

Huge deposits of platinum, coal and gold continue to make for an attractive prospect, particularly as more onerous royalty structures are rolled out in other countries. And as the mines here mature, there is sizeable scope downstream – both for increased local beneficiation and service provision for neighbouring countries. 

This second growth area is industry – which again, probably comes as no surprise given the battery of recent policy initiatives that seek to increase industrial production. 

The country already has a wide base for manufacturing – from paper to steel to agroindustry. Input tariffs, shipping costs and skill shortages have slowed growth, and firms have struggled with declining export demand, but there is still enormous room for expansion.  

Take a look at the automotive sector, for example. Thanks to the MIDP, productivity has increased, efficiency has gone up and investment has continued to flow.

South Africa’s financial sectors – and particularly its banks – also offer huge opportunities, and investors from as far away as Hong Kong have realised this.

While they were affected by the recession and drop in housing prices, South Africa’s banks have bounced back, thanks to a robust regulatory framework. 

There is a sophisticated universe of financial players, but more importantly there is also massive capacity here that very few institutions in Africa can rival. This has helped underwrite the expansion of the big four across the continent and paves the way for a jump in lending, both locally and regionally. 

Basel III implementation may prove burdensome but improving indicators for NPLs, capital buffers and profitability bode well for the future.

Finally, we also see electricity infrastructure and generation as a key medium and long-term economic driver.

South Africa’s energy networks post impressive figures – 40% of the continent’s electricity is generated here, for example – but supply has been tight, as mining and industrial companies have found out the hard way. 

But this translates into sizeable opportunities for foreign capital. 

The government is encouraging IPPs and renewables, and when you take into account Eskom’s spending programme – alongside the potential for tariff rises, shale gas exploitation – the prospects for growth are electrifying.

Still, while these sectors offer returns and opportunities to whet the palate of any interested investor, there are a number of challenges that remain to be tackled.

Perhaps the single greatest obstacle facing the country is that of non-inclusive growth. An unfortunate confluence of cyclical and structural factors have conspired to leave South Africa with a high level of inequality and a high level of unemployment – both of which pose significant long-term risks. 

Related to this are the below-trend levels of domestic productivity, which complicates life for labour-intensive exporters. The intransigent nature of wage negotiations, along with increasing input costs, drags down production.

There is also a need for greater policy clarity. South Africa’s overarching economic strategy is well-articulated but implementation of new regulations can be erratic – as seen with Walmart, toll roads and mining nationalisation. This dampens investor enthusiasm and spending.

There are more fundamental hurdles as well. High external exposure – whether to the maddeningly stubborn eurozone crisis or currency volatility – means export sectors remain overly vulnerable to exogenous shocks.

Finally, while South Africa’s infrastructure is undoubtedly among the best on the continent, without further investment, the risk of bottlenecks increases. Congestion and poor maintenance have increased logistics costs and import processing for containers is nearly three times the OECD average.  

Now, within this context we can discuss the fundamental conclusions of our research: strategy.

Oxford Business Group believes that five specific strategic moves will best help obviate the risk of losing any competitive edge, while maintaining economic growth and alleviating poverty. These elements include industrial competitiveness, education, infrastructure, fiscal management and legislative reform.

While each of these strategies merits a lengthy discussion on its own, time is short, but I’d like to take a brief look at each one in turn and elucidate what is being done to further them.

Perhaps the single most important strategy for South Africa in the short and medium-term is ensuring the competitiveness of its secondary sector. 

The Rainbow Nation faces several vexing problems and while there is no silver bullet that can solve them all, improving industrial competitiveness can help on a number of fronts: increasing employment, expanding growth, diversifying production, and boosting fixed capital.

This is hardly revelatory. In fact, it is one of the few things in South African politics that everybody – the government, the unions, the business community – seem to agree on! 

Actually doing it is a trickier proposition, but MIDP has proven it is possible. The alphabet soup of initiatives – such as IPAP2 or MECP – can yield equal success, but the country needs to address some fundamental constraints, by: improving the tone of labour negotiations, reforming domestic competition regulations and strengthening skill sets.

This takes us to our second and third key strategies, which focus on the development of education and infrastructure. In many ways, these two sectors go hand in hand. They are but two sides of the same coin – they go together like pap and gravy. 

South Africa has long made education a priority and it is one of the largest line items on the budget, accounting for nearly 20% of spending. 

But poor facilities, class sizes and uneven results are an issue, and literacy rates lag behind those of other BRIC countries.

There proposals on the table to improve access and performance, ranging from decentralisation to teacher incentives. But this momentum needs to be maintained and even accelerated – particularly at the primary and vocational levels – if growth is to be sustained. 

We’ve already talked about the importance of infrastructure, but its centrality cannot be overstated. It is key to the country’s future and while it is currently an advantage, it can quickly turn into a weakness.

Even with one of the best transport networks on the continent, there is plenty more that needs to be done. Road management at the local level is only systematic in a third of the municipalities, for example, and high usage tariffs in the maritime and aviation sectors are a concern. 

There is R3.2trn worth of new capital spending on the horizon, but South Africa needs to implement these measures in an efficient and strategic manner – with a particular focus on improving freight corridors, strengthening local maintenance and upgrading electrical capacity.

Over the past decade, South Africa has also made sizeable strides in terms of fiscal management. But public spending is almost a third of GDP, which means the government’s fiscal health has huge ramifications on economic growth.

Pretoria has consistently stressed its commitment to maintaining a healthy balance sheet and addressing longstanding structural weaknesses. The operating deficit is forecast to drop and at 40% debt is lower than even Germany. Moves to improve project delivery and shift from current to capital expenditures also bode well. 

But there is a need to take a close look at the growth of future obligations. Long-term campaigns to simplify public sector pay and reinforce revenues will ensure a far healthier future.

The country is working on legislative reforms to reduce market inefficiencies and stimulate investment – an area wherever greater efforts will reap untold rewards.

Overall South Africa is making a concerted effort to listen to the needs of the private sector, through bodies such as NEDLAC. New laws – such as the Jobs Fund – are being introduced in a number of important areas and capital is being funneled towards key players, such as Eskom and Transnet. 

Finally, increasing foreign investment remains a key component in future economic prosperity – not just for the capital it brings in but also the know-how. 

Promotion and information are one part of this and we hope The Report: South Africa 2012, as a comprehensive, authoritative and accurate review of the country’s economy – will play its own part in getting the message of South Africa’s continued potential across to a global audience.

Thank you for your time – and I hope you enjoy the rest of the morning.


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