SA’s economy faces an uncertain future

This is according to Nicky Weimar, senior economist of Nedbank, who spoke at the EBI Captains of Industry Forum on Tuesday, June 10, regarding recent trends and future challenges facing South Africa.

This comes in the wake of the World Bank revising South Africa’s economic growth forecast, from 2.3 per cent to two per cent, for 2014.

She painted a picture of where SA now stands in the global market, reflecting on the 2008 global recession and how, over the last six years, the growth rate has been too slow, with the economy losing momentum.

This year, SA’s economy shrank a seasonally adjusted annualised 0.6 per cent in the first quarter. The contraction is largely due to the strike in the platinum sector.

Regarding SA’s economic negative outlook, Weimar explained that while domestic spending helped in some way to keep the wheels turning since the disaster of 2008, a poor production sector and sluggish exports have halted any significant progress.

It has been especially the mining and manufacturing sectors that have been struggling to get going over the years.

Manufacturing, when it comes to production, is still not at the same level as at the time before the recession struck.

To illustrate this point, at the moment the output in the mining and quarrying industry has contracted sharply by 24.7 per cent quarter-on-quarter. The manufacturing industry in the meantime shrank 4.44 per cent.

Weimar laid the blame on poor performance and a lack of proper infrastructure, saying that one of the main reasons why these sectors have been performing below par is the lack of sufficient power capacity in the country.

As a result, when production picks up, companies are urged to cut back, since the power grid is under strain.

The sluggish progress of building power stations has also not aided the cause. With the possibility of potential positive progress by next year, regarding the delayed R105-billion Medupi power station, production in the mining and manufacturing sector could possibly pick up to help boost the economy.

Weimar said that high electricity costs, a volatile labour market, poor service delivery and the lack of a proper transport system has also added to the lag in production.

“We need to face the reality that the production sector is under enormous pressure; with labourers asking higher wages each year, coupled with rising costs, such as power that squeezes profits, companies have no choice but to push up prices, which make them less competitive on the global market,” she explained.

Cyclical constraints have also added to the economic strain, such as the subdued global economy, global monetary policies (specifically the US dollar) and commodity prices, which have resulted in poor performance in the export sector.

The strengthening of the Rand has also not aided SA’s cause, placing exporters at a significant disadvantage in international markets. At the moment SA is also buying more from the outside world than earning from exports, which means one is selling the Rand and buying foreign currencies.

According to Weimar, the Rand strengthened at the time when America’s economy was going though a rebuilding phase in the wake of changing monetary policies, resulting in higher investments in emerging economies.

However, this trend has slowly been changing, with America, the UK, France and Germany showing global economic growth of late, which means stabilising interest rates, resulting in more money flooding back into the developed economies.

Weimar feels that, by 2016, monetary conditions throughout the world will begin to normalise, with America’s economy back on track.

This will mean strengthening of the dollar and the weakening of the rand, which will aid export.

“What we have to keep in mind is that SA is very much dependent on foreign investment, which has been flooding in because the developed economies proved less attractive for investment,” Weimar said.

“Therefore, SA has to keep its interest levels quite stable, as it needs to remain an attractive place for investment, otherwise our economy will struggle.

“It is, after all, foreign investment that is footing the bill for our imports, so keeping many investors satisfied is very important.

“This is something that certain politicians don’t understand.”

She warned that as soon as investors embrace developed economies again, SA might have to look domestically to push up interest rates to stimulate growth.

Weimar said that even though domestic spending has helped to maintain some sort of economic growth, this is no longer a viable option. This is because all the spending was done by government to boost the civil service (including paying high salaries), with not enough emphasis given to the private sector.

As a result, government has run out of money to spend, since it needs to fund the civil service, but the private sector is no longer able to foot the bill. This leads to fiscal deficits and rising government debt.

“Our low interest rates have helped to deal with our rising debt, but we are at that point that the government must come to the party by giving more attention to spending money in infrastructure, such as power stations, which will boost the private and production sectors,” Weimar said.

“Rectifying labour relations will, for example, help to solve the strain on production, while we can improve our transport infrastructure. We also have the means to improve our education, while job creation remains pivotal to economic growth.

“Therefore, it is to a degree in SA’s hands how much we turn around our economy, to show positive growth, hopefully hitting the 3.5 per cent mark by 2016.”

Weimar warns that other factors, such as China’s slowing economic growth, could impact the global economy, while the impact of SA’s credit rating downgrade by Standard & Poor’s (S&P), and also the a shift in the country’s outlook from stable to negative by Fitch Ratings, needs to be assessed over the long run.