Cover Feature
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South Africa sits in a very exposed position. The OECD forecasts 5.5% growth for the G20 emerging economies, including South Africa, but for the country itself, only 1.9% growth this year and 2.1% next year. How do we accelerate growth and what does this mean for investors?
Well, let us start with the strange creatures, perhaps the most obvious being United States President Donald Trump, whose recent announcement of US$60 billion’s worth of tariffs on imports from China risks sparking an all-out global trade war. But there are two other strange beasts which are quite difficult to pick out and whose impact is even trickier to assess.
First is the steep decline in global trade, which is very different from global growth. Writing in 2017 for the World Economic Forum, Jaime Malet, Chairman of the American Chamber of Commerce in Spain, explains: “Historically, the volume of world merchandise has tended to grow between 1.5 times to twice as fast as world GDP. But since 2012, trade has only been growing at a rate equal to or below that of GDP.”
Malet’s observation is borne out by the volatility of the Baltic Dry Index, which reflects volumes of shipping. Traditionally used as a proxy for global trade, from a record high of 11 793 in May 2008, the Baltic Dry collapsed to an all-time low of 290 in February 2016. It has since recovered to around 1 100.
Secondly, many populations are rejecting globalisation. It can be seen in the rust belt of the American Mid-West, the manufacturing cities of northern France and similar regions of the UK. This has resulted in the election of Trump, the rise of the far right in many parts of Europe, including France and, of course, Brexit.
There may also be a third factor at work. If global GDP continues to grow, but trade shrinks, the implication is that in domestic markets, work continues, but probably in a different form. Unemployment may be at respectably low levels in the United States, but elsewhere it remains stubbornly high, especially among the youth. Why?
Enter the machines, or Industry 4.0. After all, why send manufacturing to China or Vietnam when it can be done just as well by robots back home, especially when your electorate tells you it does not feel the benefits of going global?
Why South Africa?
South Africa’s low GDP growth rate is one of the most-cited reasons for the recent series of credit rating downgrades.
The roots of the problem are “very simple”, says Konrad Reuss, S&P Global Ratings MD for sub-Saharan Africa & South Africa. “It’s the combination of low per capita incomes – low income levels, if you like [and] the tremendous development needs. That obviously puts pressure at any given time on the government [and] on the budget, and leaves government and the National Treasury with very little fiscal flexibility.”
Speaking recently at Johannesburg’s Gordon Institute of Business Science, Reuss also blamed increasing public sector employment, wages and social transfers. The resulting persistent weakness in growth had been responsible for the downgrade by his agency of South Africa’s sovereign debt to junk status last year, he said.
University of the Western Cape (UWC) economics professor Matthew Kofi Ocran notes problems with both the debt burden and governance at state- owned enterprises (SOEs), but is also concerned about what he calls “the labour market situation”.
“You want radical economic transformation? I’ll give you radical – privatise the whole lot!”
“The product market of the economy is freed up, so producers can determine how to price their products and what to produce. But when you look at the labour market, which is also a very important factor of production, you have a lot of restrictions in terms of labour laws. People can’t hire and fire easily. The net effect can be compared with direct taxes – no wonder we’re seeing huge unemployment rates,” says Ocran.
Wandile Sihlobo, agricultural economist and Head of Agri-Business Research at the Agricultural Chamber of Business (Agbiz), traces South Africa’s woes back to the Global Financial Crisis of 2007/8, but notes that when other countries’ economies began to pick up in 2012/3, “we remained in a down part and much of that… was really the domestic factors… the politics of the time”.
Changing gear
What, then, does South Africa need to do to emerge from this low-growth trap?
“Structural reform,” states Dr Martyn Davies, MD of Emerging Markets & Africa at Deloitte Africa. “But what does structural reform actually mean? I believe it’s a synonym for sensible economic policy.”
Davies believes South Africa has gone through a crisis – not “a blow-out like Brazil, but rather a long, slow burn. [However], many people, particularly in ANC leadership circles, don’t even realise there’s been a crisis. The rest of us have certainly felt it. The institutional integrity in South Africa has bottomed out. We’ve now reached a turning point following the election of Cyril Ramaphosa as ANC President and [his] subsequently becoming State President.”
Davies’ prescription is clear: “Countries recover from crisis by spending wisely, managing debt and having policies which are pro-business and market- liberal. The state-driven approach to growth is what causes crises in the first place and you also have
• On paper, global GDP growth for 2018 and 2019 is projected to be around 4%, but there are twists and turns in the offing.
• Globally, Donald Trump risks sparking an all-out global trade war after announcing US$60 billion in import tariffs. Trump’s move comes in the face of a world that is seeing a steep decline in global trade.
• Factors like rising unemployment, a hike in popularism and anti-globalisation sentiment and the rise of Industry 4.0 are important global shifts.
• South Africa is battling both a low-growth conundrum and a need to address social ills. Playing servant to these two masters is dragging both down.
• Issues like land expropriation and the need to reform state-owned enterprises continue to hold back investment.
• We may be entering a world in which people and ideas are globalised, but money and goods are de-globalised.
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