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Testing times for South Africa

Marek Hanusch's picture

 Steven Hall, World Bank Group

Concerns about South Africa’s economy have been rising, after years of slowing growth following the post-financial crisis peak of 3.2% in 2011. South Africans lament the plunge of the Rand—a 30% depreciation against the U.S. dollar over the year 2015. They fear the potential of South Africa losing its high-prized investment grade credit rating. Many, especially the youth, live with high and largely chronic unemployment, currently at 25.5%, or 36% when including those who have given up looking for a job. Not surprisingly unemployment is the top concern for 72% of South Africans according to the 2015 Afrobarometer. Growth and job creation are crucial for sustaining the impressive economic and social progress the country has achieved since the end of apartheid—and to eliminate extreme poverty by 2030, as envisioned by the National Development Plan (NDP).

In the eighth volume of the South Africa Economic Update, we project growth at 0.8% in 2016 and 1.1% in 2017. Given demographic dynamics (which we discussed in our previous economic update), this means that gross domestic product(GDP) growth per capita will have been declining for at least four years, from 2014 through our projection period, up to 2017. Our projections also mean that the economy would have to grow by 7.2% annually beyond 2017 to meet the NDP target of doubling GDP between 2011 and 2030, supporting the creation of 11 million jobs. There are just a few star performers in the world, such as China and neighboring Botswana, which have achieved such break-neck growth over prolonged periods of time.

Granted, South Africa is not the only country with an underperforming economy. As our 2016 Global Economic Prospects demonstrates, emerging economies, especially commodity exporters, such as South Africa, have been slowing, while developed economies are beginning to recover. Weaker demand for commodities from China has sent many emerging market currencies spiraling downward and depressed export performance. Emerging economies were also hit by a reversal in capital flows as monetary policy has begun tightening in the United States, heralding the emergence of the U.S. economy from the long shadows of the global financial crisis. To make matters worse, El Niño, a global weather phenomenon, has wreaked havoc on agriculture, not only in South Africa but also neighboring countries. This is a disaster, especially for the rural poor; we estimate that as a result of the drought an additional 50,000 South Africans fell into poverty in 2015.

But it would be wrong to blame all of South Africa’s economic woes on external factors. In fact, South Africa has been trailing other BRICS economies for a while in GDP per capita terms. A host of domestic constraints is holding back South African growth. Policy uncertainty, for example around AGOA, investment rules, and tourism visas— which have recently been exacerbated by questions arising over unforeseen ministerial appointments—have made investors more cautious. Other factors are structural, including electricity shortages, uncompetitive domestic goods markets, and fractious labor relations all which work to hold back investment. Such constraints mean, not least, that South Africa will find it harder to make necessary adjustments to seize the opportunities that come with tectonic global economic shifts as the ones we are witnessing. For example, the weaker rand and China’s transformation from an investment-led to a consumption-led economy provide new opportunities for manufacturing exports—and South Africa is one of the few countries in Africa with a strong manufacturing industry. South Africa also has significant potential in services and agribusiness. Without transforming the economy, South Africa will suffer the downsides and miss the upsides of global economic shifts.

While global developments will continue to shape the country’s economic fate there is considerable room for South African policymakers to take decisive decisions and prove the analysts wrong. These include measures to fast-track the implementation of investments in key infrastructure, especially power; increasing the flexibility in factor markets (land, labor, and capital); allowing greater competition domestically, as in the banking, logistics, and IT sectors and trade in services; and improving the quality of education and skills development system. In Chapter two of our update we look into one such area for reform, focusing on improving competition in domestic markets. It is one area where South Africa already has a good track record and where the country can further build on its past achievements, promoting both growth and poverty reduction.

Comments

Submitted by Juan on

Very thoughtful and timely blog.

It seems that dark clouds are gathering for many commodity dependent countries and very worthwhile to explore the less rosy scenarios.

Would be interesting to understand how precisely the "downturn" in China has affected South Africa, given that China's commodity imports continued to increase (by 9% in 2015). The effect is certainly present, but seemingly through a more indirect mechanism (financial markets, capital investments etc.).

Or is it that South Africa has lost market share to other commodity exporting countries?

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