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South Africa: South Africa Economy Profile

2015/12/05

 South Africa Economy Profile


South Africa’s increase outlook is still unfavourable; in the short-term, increase will be held back by low investor confidence, while in the medium run structural weaknesses in areas such as infrastructure, labour and competition will need to be addressed. However, dealing with these issues is currently difficult due both financial and political challenges.

Strengths (+) and weaknesses (-)

(+) Strong institutions and deep financial markets

South Africa has strong institutions and rather sophisticated financial markets. That has attracted large volumes of foreign capital and rendered South Africa the gateway to investing in the rest of the continent.

(-) Structural increase constraints

A large infrastructure (particularly energy) deficit, rigid producer and labour markets and skills shortages constrain South Africa’s potential economic increase.

(-) Poor improvment

The South African society is highly prone to unrest due to widespread poverty and one of the highest levels of inequality. The young (48% of the people) are thereby often jobless (50% youth unemployment) and are politically disengaged (only 1/3 registered for voting).

(-) Large twin deficit

South Africa’s financing needs are high on the back of a structural and large twin deficit. Therefore, the country is susceptible to domestic and world market sentiment, particularly since net direct investment flows fall short of covering the current account deficit.

Key developments

1. Increase remains subdued amidst low investment and sluggish consumption growth

Economic increase is expected to increase somewhat in 2015 to about 1.8% y-o-y, up from 1.5% in 2014. This leaves increase substantially below levels completed in 2010 and 2011 (figure 1). Increase is particularly low because fixed investment has stagnated; on corporate side the country ‘s mounting structural constraints and a worsening policy environment hold back investment . Residential investment is held back by strict lending criteria of banks and higher personal tax rates. Consumption therefore remains the primary increase driver in the current and next year. However, a tariff increase and the weakening of the rand (figure 2) have contributed to a slowdown of consumption increase.

Increase remains subdued

Due to rapid increases in the government’s social and wage commitments the government has so far failed to realise the planned fiscal consolidation. As the government has again been postponing this consolidation we expect a positive contribution of government consumption to increase next year. The external picture is mixed. The current account is expected to improve somewhat (figure 3), as the weak rand supports exports, but may be equally hurt by the Chinese slowdown (13% of exports go to China) and weakness on commodity markets. The fact that the current account deficit is to a large extent financed by deficit could pose risks. However, as foreign liabilities are to large extent denominated in local currency while the currency has depreciated the net international investment position improved to -4% of GDP in 2013.The risk of strikes in the mining sector remains substantial, despite a recent agreement between the sector and unions.

Current account slowly improving

2. Electricity shortages hurt exports

South Africa’s electricity shortages are increasingly affecting the real economy as request for power keeps growing. Next years of underinvestment in the country’s power supply, request for electricity has been outstripping supply since the start of the year, resulting in blackouts. These are particularly detrimental to the mining industry, which uses 15% of all electricity for drilling and pumping water from mines. The manufacturing sector as well suffers from the blackouts. This hurts exports, with mineral exports making up 60% of total exports, thereby widening the current account gap, but is as well bad for the country’s perceived business climate. South Africa’s national power utility Eskom is trying to increase the power supply by building two new power plants, the Medupi and Kusile plans, which are nearing completion next critical delays in the completed. Initial power (800 MW) from Medupi is expected approaching on line by the end of 2015; Kusile will follow later in 2016. Further investment in capacity and the degraded infrastructure is constrained by a USD21 billion financing gap on the part of Eskom.

3. Zuma could still face prosecution but threat to political stability is limited

President Jacob Zuma continues to suffer fallout from corruption scandals. Corruption charges against Zuma, which were initially dropped in 2009 by again chief of the prosecutor Mokotedi Mpshe, but that judgement has presently been called into question by the same office. Meanwhile, occasional anti-corruption marches take place, though these are unlikely to have significant political consequences. Despite all the recent trouble for Zuma and his ANC, the country’s politics are stable and the ANC managed to fasten 62 % of the national vote in last year’s general elections. There is little political momentum for addressing some of the structural challenges, as prospects for labour reform, deregulation of producer markets and development of electricity and infrastructure remain unfavourable. This weighs negatively on the medium term economic outlook.

Factsheet South Africa

Background information

South Africa is the second largest economy in Sub Sahara Africa. The country is the world’s largest platinum producer and one of the largest gold producers. Mining products bring in a lot of FX but also expose South Africa to volatility in these markets. Overall, the economy is relatively developed and diversified. However, market inefficiencies such as monopolistic structures in many sectors, a dysfunctional labour market and skills mismatch hamper the development of the private sector and keep unemployment at high levels of 25.1% in 2014 (35% including discouraged workers). The society is characterized by a huge inequalities (e.g. centres of economic activity are far from the poor and inaccessible due to high transportation costs). Corruption and capacity constraints have limited the impact of higher spending on development. Despite the introduction of a social benefits system that covers 30% of the population, poverty and inequality are pervasive. Crime rates are some of the highest in the world and South Africa hosts the largest number of HIV infected people (6m).

In 1994, South Africa abolished apartheid in favour of majority rule. A new constitution was adopted. The country is characterized by a robust separation of powers between the executive, the legislative and the judiciary, and independent institutions such as the Supreme Court. Under the Zuma administration, there has been a weakening of the anti-corruption framework. Political pressure on the judiciary and the media has increased, signals a decline of the quality of public governance. South Africa plays a leading role in regional security and economic initiatives.

Economic indicators South Africa