Sandeep Mahajan's blog

South Africa appears to be mired in a cycle of modest growth, high inequality and record unemployment. This, despite an exemplary record on macroeconomic management and deepening integration with the global economy. 

Inflation remains nestled within the target range of 3-6 percent and fiscal and debt management outcomes have been impressive.

Remarkably, there is broad political consensus on the issue of macroeconomic stability, recent calls for a looser stance by the labor unions notwithstanding. 

Residents of the pukka houses (formerly temporary shacks) in front of the apartment complex where my family lives in New Delhi have decided to send their kids to private, English-medium schools, cutting corners to save enough to be able to afford it.

The children had (and still have) access to free basic education in government schools, but they and their parents don't care. Notionally enrolled, more often than not the kids were seen playing cricket on the street that divides their houses from our apartment complex. Things began to change as India’s economy took off, and, with that, the perceived premium on quality education. While the public education system remains in the doldrums, market forces seem to be compensating, at least partially.

Almost two decades after Nelson Mandela's globally-inspiring long walk to freedom, millions of his compatriots find it prohibitively expensive and time-consuming to simply get to work. Millions more have no work, and the geographical separation of the poor from centers of economic activity has a lot to do with it.

Take the case of Lydia (pictured here), who is a soft-spoken, gentle mother of two boys -- a one-year old baby and a fifteen-year old teenager. Each in his own way needs his single mother's attention and time. Time that she has very little of, because she has to spend close to five hours commuting to and from her place of work, the World Bank office, where she is one of the housekeeping and cleaning ladies.

The 2010 FIFA World Cup drew to a close on July 11, 2010, with a Spanish victory and a thunderous ceremony. South Africa took a bow as the world applauded its wonderful organization of the high profile tournament.

A record number of people across the globe viewed the tournament, and the crime rate was the lowest of any World Cup. The direct economic impact of the event is estimated at around 0.5% of GDP in 2011, and the tournament did much to burnish South Africa’s image across the world as an attractive tourist destination.

Sadly, the real drama started after the curtains came down on the World Cup.

In particular, a coalition of unions, representing over one million-public servants -- including teachers, doctors, nurses, police, and court and government officials -- has launched an indefinite strike after the unions’ demand for an 8.6% salary increase (plus 1,000 rand monthly housing allowance) was rejected by the Government.

As the month-long FIFA 2010 World Cup tournament kicks-off on June 11, all eyes will be on South Africa. Quite literally, since the 2006 tournament in Germany had a global viewership of around 30 billion.
 
The event is an opportunity for South Africa to showcase itself not just as an attractive destination for tourism and investment but also as the Rainbow Nation, home to people of every race, color, and creed.
 
The economic dividends will be plenty. As President Zuma explained: “the country’s transport, energy, telecommunications, and social infrastructure are being upgraded and expanded. This is contributing to economic development in the midst of a global recession, while improving conditions for investment.” 
 

Some economists are skeptical, seeing white elephants in large stadium constructions and citing analyses that show little net economic benefit to the hosts of previous such events.

Something is  not quite right with this picture.

There has been somewhat of a celebration lately in the South African press and markets, sparked by news that the external trade balance was moving into positive territory following several months of trade deficit.

The fact that three consecutive months of trade surplus (May-July 2009) were recorded for the first time in 6 years has made it even more special. Market analysts have exulted that “South Africa's economy was likely to recover as the balance of trade improved," [which] "underscores our bullish outlook for the current account deficit." The positive mood further whetted the appetite of foreign investors, who have poured more than $7 billion into the Johannesburg Stock Exchange in 2009 thus far, bolstering the Rand to a one-year high against the US Dollar by end-August. 

In recent months, the external sector in South Africa has strengthened in ways that are somewhat perplexing. The strengthening has partly to do with weak import demand due to the economic slowdown.  But the surprising aspect has been sustained inflows of foreign portfolio investment in South African domestic securities.  Just as the news on the real sector and fiscal balances has gotten worse, somewhat paradoxically foreign investors’ appetite for South African securities has grown. Negative reports on economic performance have been unrelenting -- recession and higher unemployment, biggest declines on record in manufacturing and mining, battering of the automobile industry, and a much-larger-than-anticipated fiscal gap.  Yet, the Rand stood at a 10-month high against the US dollar on June 30, whereas currencies in Brazil, India and Russia had lost much more ground against the greenback. The country issued a 10-year, US$1.5 billion bond on international markets in May, and it was oversubscribed several times over at a modest spread of 368 bp over LIBOR.  By end-June, foreigners had net purchased about US$4.5 billion of bonds and stocks on South African markets.

No doubt, foreigners are attracted by the country's good record on macroeconomic stability, financial sector discipline, and rapidly rising investment in infrastructure, although they may be deterred by its large current account deficit.  But that record has not changed in recent months. So what explains this seeming dichotomy between progressively bad news on economic performance and strengthening interest of foreign portfolio investors?  A penny (or 8 South African cents, which would have been 10 cents in April) for your thoughts.