Skip to main content

Is There Still Gold At The End Of The Rainbow?

Published 8 years ago
By Forbes Africa

With its fifth round of democratic elections slated for next year, South Africa has much to be proud of as it looks back on the achievements of the past 20 years. Thanks to reconciliation efforts, the Rainbow Nation navigated a difficult political and social transition with poise—something many countries have attempted, but rarely with such success.

Its films have won Oscars, its stadiums have hosted World Cups and its leaders have won Nobel prizes. Since 1994, the economy has transformed dramatically, absorbing 3.5 million new jobs and with a quarter of the continent’s GDP, it has successfully held the crown as the largest, and arguably most sophisticated and open, market in Africa.

However, the country still has one of the highest gini coefficients in the world, at above 0.63, indicative of the lack of inclusive growth. Unemployment is high and infrastructure is beginning to grapple with increasing demand. With South Africa’s GDP growth projected at roughly 2% for 2013, it is only a matter of years before Nigeria, expanding at rates of 7%, overtakes it as the continent’s economic heavyweight.

As a result, assessing the current state of the country and its performance requires a nuanced understanding of both the strengths that provide it with such potential and the weaknesses that threaten to undermine its progress.

The country’s fundamentals are in rude health. South Africa has a number of key competitive advantages. With more than $2.5 trillion worth of mineral reserves and the potential for commercial shale gas production, it boasts enormous natural wealth. Its business environment is among the strongest on the continent, with low interest rates, clear investor rights and a comparatively streamlined bureaucracy.

South Africa’s political system is fairly robust, and while the successive victories of the African National Congress (ANC) have caused complications of their own, the levels of voter turnout regularly exceed 75%, which is up to 10 percentage points higher than Britain.

The relative quality of infrastructure also provides an excellent base for expansion—South Africa’s national utility provider Eskom, which does nonetheless grapple with high demand, still accounts for just under half of all the electricity consumed in Africa.

Similarly, the penetration rate for financial services—an indicator of both consumption and potential for leveraged growth—in terms of the percentage of the population that has access to formal credit products is nearly three times the continental average. South Africa’s regulatory frameworks for its banks—which include the four largest in Africa—are among the most robust of any Organization of Economic Co-operation and Development (OECD) countries, and were rated third globally by the World Economic Forum (WEF) in terms of soundness for 2013-2014.

However, in spite of all these attributes, South Africa’s long-held position as the gateway into Africa is increasingly under challenge. The country’s sophistication is in part responsible for this. It is among the most-globally integrated markets in Africa, which has left it highly exposed to the continuingly depressed levels of export demand in key markets like the European Union, as well as to portfolio outflows which have left the rand vulnerable.

While the benchmark interest rate, unchanged at 5% for several consecutive quarters, is being kept at historical lows in an effort to stimulate lending, it still exceeds the average repo rates available in much of Europe, North America, and Japan; in turn attracting yield chasers.

But there are also stubborn challenges. Much of the country’s physical and social infrastructure is aging and in need of revamping. South Africa’s electrification rate—at 75% nationally—is the highest on the continent but a narrowing gap between supply and demand has led to load-shedding, which has constrained output and emphasized the need for new base load capacity. High levels of youth unemployment have led to social unrest. Wealth inequality is still high, but with a debt-to-GDP ratio that rises to 60% with off-budget commitments, the ability of the government to pay for social grants and benefits to the current 16 million recipients is becoming increasingly strained.

These challenges are taking their toll.

South Africa’s overall growth is expected to increase modestly in 2014, but still remain below 3%. The expected changes to poverty and unemployment levels are expected to remain minimal.

In the latest WEF Global Competitiveness Report, South Africa fell one spot from 52nd to 53rd out of 148 nations surveyed. The change in ranking reveals a mixed bag of both positives and negatives. With the overall score bolstered by top-five ratings in areas such as financial market development (3rd); auditing and reporting standards (1st); and accountability of its private institutions (2nd), but dragged down by an educational system (146th); labor market efficiency (116th); and burden of government regulation (116) that are rated poorly and place in the bottom 50.

A glance at the some of the country’s key sectors helps illustrate both the country’s potential and its weaknesses. With minerals accounting for around 60% of exports, the sector serves as a barometer and proxy for how the performance of the wider economy. South Africa is the largest producer of platinum group metals in the world, and in the top five for a host of other minerals and metals, including coal and gold. However, labor unrest, rising costs and slowing demand have contributed to more constrained output and concerns over mine closures.

The automotive sector provides a similar example. Constituting around 6% of GDP and 12% of exports, and hosting manufacturing and assembly plants for major international car makers like BMW, Mercedes, Toyota, General Motors and Volkswagen, automotives is often cited as an industrial success story and referenced as an example of what the country can achieve through targeted and proactive legislation and cooperative engagement between government, business and labor. Yet, the automotives industry is coming off a month-long strike during which exports fell 75%, costing manufacturers $2 billion.

For South Africa to unlock its potential, structural reforms are needed. Key to this will be the effective implementation of the National Development Plan (NDP) which is intended to form the strategic base for policymaking until 2030. The initiative seeks to rein in further rises in recurrent spending, while channelling more funds towards specific capital expenditures.

Alongside the New Growth Path (NGP), an economic policy focused on job creation, and sectoral policies such as the Industrial Policy Action Plan (IPAP), the NDP offers significant scope for mitigating the country’s weaknesses and encouraging a significant increase in secondary and tertiary activity. It will not be easy, but it offers a clear road map to strengthening South Africa’s comparative advantages in a more inclusive and sustainable manner.

Ultimately, assessing South Africa is all about context. Both its potential and accomplishments are vast, and many developed economies in the world would happily swap balance sheets. Over the past two decades, South Africa has seen its share of up and downs, although the pros have outweighed the cons. The outlook for the coming years may be murkier, and the obstacles more intransigent and complex, but the country’s healthy fundamentals and past performance provide reason for optimism.

Sign Up for Our Newsletter Daily Update

Get the best of Forbes Africa sent straight to your inbox with breaking business news, insights and updates from experts across the continent.
Get this delivered to your inbox, and more info about about our products and services. By signing up for newsletters, you are agreeing to our Terms of Use and Privacy Policy.
Related Topics: #Eskom, #GDP, #Infrastructure, #November 2013, #Rainbow Nation, #South Africa, #unemployment, #World Economic Forum.