South Africa Year in Review 2013

With slow but steady growth in 2013, South Africa saw comparatively reasonable performance last year, although there remains a sense that the resource-rich country is operating below its considerable potential.

In an October report on the country, the IMF praised South Africa’s progress since the advent of majority rule in 1994, noting a 40% increase in inflation-adjusted per capita GDP. It went on to praise sound macroeconomic fundamentals, including a prudent medium-term fiscal framework, monetary policy that has managed inflation expectations while reducing interest rates to boost lending, and a modern financial sector that meets international standards of regulation and capitalisation.

As ratings agency Fitch noted in December, South Africa’s banks have a capital adequacy ratio of 14.9%, while 92% of government debt is local-currency denominated, helping shield both from external shocks – though debt as a proportion of GDP has been rising as the country runs a deficit, which it must eventually rein in. The current account deficit has also been growing, now equivalent to more than 6% of GDP. Foreign financing stands to become only more difficult and costly as the US Federal Reserve winds down its quantitative easing programme.

Slowing growth in 2013

In a sense, South Africa’s high level of integration into the global market has actually left it at a slight disadvantage compared against other less-developed but better-buffered markets in Africa. Since the international economic crisis started to take effect in 2009, South Africa has grown at an annual average of 3%, below that of other major economies elsewhere in Africa, such as Nigeria (7%) and Kenya (5%). The country’s relative affluence does not entirely explain away these figures.

According to the latest forecast from the Treasury Department, issued in October, the economy was projected to expand by 2.1% in 2013 – still robust compared to markets in Europe and North America, but a slight easing from the previous year as the result of both foreign and domestic factors.

The difficulties experienced by the eurozone – a major trading partner – and slower expansion in China and other major emerging markets have affected exports and investment, although an increase in sub-Saharan African trade has partially offset the decline in global demand.

At home, labour unrest was a drag on the economy in 2013, affecting key sectors such as gold mining, construction and automotive manufacturing. Strikes put a damper on consumer and business confidence, pulling down consumption and investment, while “overly-high wage settlements” were a “key risk” to inflation and the growth outlook, according to a report from the central bank in June.

Wage increases also potentially act as a disincentive to hiring – an important issue in a country with unemployment around 25% and youth unemployment twice that. The Youth Wage Subsidy Bill, passed in October and set to go into effect this year, will help address the latter, providing tax breaks to companies that hire younger employees.

Strikes have also delayed the completion of a new 4800-MW power plant, Medupi, although it is now expected to come on-line later this year, which will help alleviate electricity shortages. In November, Eskom, the state-owned utilities firm, had to ask its biggest heavy industrial clients to ease their power consumption by 10% at peak times to lower the risk of outages. While the measures lasted only a few days, they underlined the urgency of rehabilitating Eskom’s network.

Investing in human resources

Investments and reforms should help tackle South Africa’s energy problems, but both will also be needed to address what are arguably the country’s biggest challenges – poverty and unemployment.

As the IMF has noted – and the government has acknowledged in its National Development Plan, details of which it confirmed in 2013 – upgrading the skills base is a priority.

A March 2013 analysis by international consultancy firm Grant Thornton revealed that 83% of South African businesses reported a shortage of technical skills when recruiting, a serious issue for a country that needs to generate meaningful work and increase the value-added elements of its economy in a competitive global marketplace.

The problem in part stems from the education system’s weaknesses, which were described as “a critical problem” by the OECD in its 2013 Economic Survey of South Africa. The OECD suggested reforms including better allocation of resources, improvements in teacher training and vocational education, and giving head teachers more autonomy and accountability. The government is committing resources, but spending has not always been matched with improvements on the ground.

Going into 2014, South Africa faces familiar challenges but the government has shown that it recognises the areas that need to be addressed, most importantly in tackling unemployment. While it will face political opposition in pushing through reform, there is a growing recognition that South Africa, with its great potential, cannot afford to keep moving in its current low gear much longer.

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