27 Jan 2015
South Africa Looks for 2015 Turning Point after a Grim 12 Months
Can South Africa's government address the longstanding problems that have hampered the country's economic growth and resulted in damaging industrial strife throughout 2014? For many, 2015 is seen as year when real change is needed.
You don't need an economics degree to know that 2014 was a pretty grim year for South Africa in general and for its business sector in particular. Last year, South Africa's economic growth averaged 1.4% – half of what the government had predicted in January 2014. Local and international analyses now emphasise that the country's main challenge remains its inability to grow its economy to a sufficient extent to alleviate unemployment and poverty.
As for South Africa's 2015 economic growth, the South African Treasury is predicting that it will be in the region of 2.5% – although a precondition for any such growth is a lack of the kind of strikes that hampered South Africa throughout 2014. That figure, though, may be optimistic – in late January 2015 the IMF lowered its forecast for the year's GDP growth to 2.1%, down by 0.2% from its October 2014 forecast. According to the IMF, the lower figure reflects falling global commodity prices, which will depress the value of South Africa's key mineral exports.
Unfortunately, 2014 began – and then continued – with a number of crippling strikes that disrupted South Africa's platinum-belt mines and manufacturing sectors for several months. As well as slowing economic growth, these strikes brought into focus the government's inability – or perhaps reluctance – to deal with labour disputes, as well as its poor relationship with the business community. South Africa relies heavily on its mineral-resource revenues and the industrial action severely dented business confidence in South Africa's primary and secondary sectors. The country's government has subsequently faced criticism that it didn't do enough to respond to the labour-market disruptions, with production of one of the country's major commodities halted for five months.
Another major setback for South Africa's economy in 2014 was the failure of its ailing power utility, Eskom, to provide continuous electricity supply to the grid. Power cuts were initiated across the country in late 2014, following mechanical problems at one of the state-owned company's power stations. Moving into 2015 and South Africa now faces a power-supply crisis and one likely to be a major hurdle to doing business in the country. This will not be remedied until a much-needed new power station – originally due for completion last year, but now delayed until June 2015 – comes into operation. The power shortages, meanwhile, are set to continue throughout 2015, with inevitably negative consequences for business and investor confidence.
Then there is the socio-economic impact of unemployment. South Africa's jobless rate stood at 25.4% in the last quarter of 2014. Although this was a slight drop compared to the third quarter, South Africa, nevertheless, faces a critical unemployment problem, with its youth unemployment rate – for those between the ages of 15 and 24 – now the third highest in the world. According to the World Economic Forum's Global Risk 2014 Report, more than 50% of the South Africans in that age group are currently unemployed.
Government borrowing is a further constraint on growth. South Africa's large current account deficit is an ongoing risk to its credit rating. In 2014, both the Fitch and Standard & Poor credit rating agencies downgraded South Africa, with analysts predicting that further downgrades are on the cards for 2015.
Finally, excessive spending in the public sector and several cases of tender fraud in the civil service also marred the country's image and performance in 2014. A report released in March 2014 by the country's Public Protector – a state institution that investigates complaints against state agencies and officials – found that President Zuma had spent R246 million (about US$21 million) of taxpayers' money on improvements to his personal residence. As a consequence, the government is now indicating that it will take steps to crack down on public-sector corruption, while the Treasury has pledged to cut back on wasteful government spending in a number of areas, notably public procurement.
On a brighter note, falling oil prices are starting to have a positive effect on inflation in South Africa. Economists predict that consumer price inflation will fall below 5% in 2015, which is within the government's target. Lower oil prices will also help keep input costs down for business and put interest rates on hold. While this will provide a welcome relief, it may well prove only a temporary respite.
Generally, analysts are warning that there is little chance that the country will fare any better in 2015 than in the previous 12 months – unless the government genuinely commits to overcoming the structural constraints. To date, the Zuma administration has largely been seen as being high on rhetoric, but low on delivery.
A case in point here is the National Development Plan (NDP). This is the government's strategic policy outline for the country's socio-economic development through to 2030 and aims to provide a platform for a faster-growing, more inclusive economy. There has, however, been little in terms of real action to implement these objectives. Will the NDP remain just that – a plan – or will the government ensure its success by implementing the substantive changes needed to address the key structural issues? This is seen as the only way for it to deliver its goals of increased employment, economic growth and greater social equality.
When Nhlanhla Nene, the Finance Minister, delivers his budget speech to Parliament on 25 February, investors will be looking for signs of some realistic policy solutions in the form of tighter fiscal control, as well as ways to address wasteful government spending. They will also be looking for Nene to introduce confidence-boosting measures aimed at helping growth and creating a more reassuring situation for investors, as well as more enabling environment for business. As Nene has already acknowledged the need for better infrastructure in order to enable growth, many will be waiting to see if his budget allocates enough state investment to the required infrastructure-network upgrades.
The finance minister, for one, acknowledges the challenges facing the country. Speaking late last year, he said: "South Africa needs to work swiftly to lift its binding constraints on growth if it is to achieve rapid and inclusive growth."
Despite his caveats, he is known to be generally upbeat about South Africa's investment outlook. In January, he said: "What we are saying to investors is that South Africa is open for business." He has also has gone on record as acknowledging the need for improved labour productivity in the form of swifter dispute-resolution methods and better control over long-standing labour issues.
The business community, though, will be looking for indications that the state will be providing greater support to the corporate sector. Tackling the high levels of mistrust between the public and corporate sectors in South Africa remains a major challenge. It is a problem that has only been exacerbated during the course of the Zuma regime.
Business-minded critics maintain that the government needs to realise that business and investors are vital partners and not enemies of the state – a perception that is partly a legacy of the ANC's anti-apartheid struggle. For Nene, there is a clear need to address this and he has acknowledged the importance of greater interaction between government and the corporate sector, seeing this as essential for securing increased private-sector investment. With this very much in mind, he said: "The next phase of growth will be about the synergies between the private sector and government. The next two years will be challenging and South Africa needs to address its own internal challenges as a priority."
Another challenge for South Africa is clearly the subdued global economic outlook. China, for example, is South Africa's biggest trading partner and its own economic slowdown has clear implications. On the positive side, the Chinese and South African heads of state met in Beijing last December to sign longer-term strategic agreements on trade and investment, while strengthening mutual co-operation in economic- and BRICS-related affairs. Despite this accord, in the short term, prospects will be dictated by the markets, with sluggish demand from China for raw materials inevitably depressing revenues for South Africa's minerals sector in 2015.
China, meanwhile, is expected to continue to look for good investment opportunities in South Africa this year, as well as ain the continent's other economies, collectively enjoying something of a virtuous cycle of growth. The IMF has forecast that Africa's economic growth will average 5.75% in 2015 – making it the second-fastest-growing region in the world.
The challenging domestic conditions notwithstanding, Rob Davies, South Africa's Minister of Trade and Industry, remains bullish about South Africa's economic and investment prospects. In a statement issued in the run-up to the World Economic Forum's annual Davos gathering in January, Davies indicated that South Africa remained "an attractive and reliable investment destination".
He said: "South Africa continues to compare well with other emerging markets, with the country accounting for the bulk of new investment projects in Africa – with investment arriving from the US, some EU states and, increasingly, from China and other Asian countries."
Davies also pointed out that South Africa has improved its rankings in a range of indicators that gauge any given country's ease as a place for doing business. The Global Financial Times magazine voted South Africa the best investment destination in Africa for 2013 and 2014. In line with this, Davies believes that the issues South Africa currently faces are simply consistent with its status as a developing nation, saying: "South Africa will be confronted continually by considerable socio-economic challenges that need to be resolved."
Others, however, don't take such a positive view and are predicting that things will get worse before they get better, with 2015 needing to prove a turning point. In truth, the government does, indeed, face tough policy choices.
Last year, during the ANC anniversary celebrations, the President promised a radical socio-economic transformation. What was missing in his message was any detail as to how his government intended to deliver this. Speaking in January, Vusi Khumalo, President of The South African Chamber of Commerce and Industry, called on the government to stimulate economic performance and respond to ratings agencies' and investors' concerns by creating a more conducive environment for business.
He is not alone in believing that this needs to be a year of change. For many in the South African business community, if the government doesn't face up to the harsh reality and accept that it has to do something very different, the same old constraints will continue to plague the economy, with the consequences being disastrous for business and investment.
At present, the government maintains that it is committed to creating an enabling environment for investment and growth. Nene, for one, is confident that the government actually has the necessary framework in place in order to turn things around. Perhaps Davies sums it up best, saying: "South Africa desperately needs to begin creating the conditions to improve its competitiveness".
Mark Ronan, Special Correspondent, Cape Town