Sending positive signals to investors
Published: 25 May 2009
South Africa boosts state spending to foster growth
South Africa's ruling African National Congress (ANC) won the April 2009 general election, as had been widely predicted. However, the party failed to obtain the two-thirds majority necessary to change the constitution.
Of the 17 million votes cast, the ANC took 65.9 per cent. The other two main party challengers, the Democratic Alliance and the Congress of the People, obtained 16.66 per cent and 7.42 per cent respectively.
The result is positive for the country, according to HSBC's Eastern Europe, Middle East and Africa economist, Kubilay Ozturk. Continuity will be maintained and investor confidence will not be shaken, at least not in the short term.
Investors like stability
"Before the election, the ANC published an election manifesto in which the party implicitly stated that there may be some shifting away from market-oriented policies towards government-directed solutions," Mr Ozturk said. He added that such a move could affect investors in South Africa as these solutions are expected to address the economic challenges that the emerging market is facing and promote growth.
Analysts point to unemployment as the main obstacle to poverty reduction and accelerating growth. Unemployment levels have increased from around 15 per cent in 1994 to the current 23.5 per cent. Despite this, Mr Ozturk believes that South Africa has taken the first step towards economic stability.
Investors require political stability, he stressed. With the ANC still in place and the well-respected Trevor Manuel, the former Finance Minister, retained in the cabinet, the market would not face an imminent threat of change.
"The main thing is that political stability is favourable for South Africa. The investors like stability," he said.
The World Bank has described South Africa's economic growth as robust: between 1994 (the year the ANC came to power in South Africa's first democratic elections) and 2003, real GDP growth averaged three per cent, almost three times the growth rate recorded between 1980 and 1993. The growth rate for 2004 to 2007 was about five per cent.
The South African economy is two-tiered. There is the formal economy, which is driven by large corporations and attracts Africa's biggest volume of foreign direct investment, and there is the informal cash economy, which is driven by small businesses.
In 2006, the government launched what it called the Accelerated and Shared Growth Initiative for South Africa. One of its goals is to bridge the gap between the first and second economies by eradicating poverty and reducing inequality.
Shift to the left
"The ANC has already highlighted its commitment to education, health, security, job creation and food and land reform. The party will be closely watched by internal and external agents," Mr Ozturk said.
He expressed concerns over the party's alleged preference for leftist government policies to address unemployment and poverty.
"The country is still on the positive side of the growth curve, so it needs investments, it needs capital inflow, it needs investors' portfolios. But if the ANC is biased towards the left, this will affect the investors. The country will risk reaching its potential growth. This would be negative for the country."
Even if the ANC is considering left-leaning policy, the party will not rush into things, according to Mr Ozturk. "I think it will be balanced, going forward. The ANC cannot do things overnight. But they will certainly tackle unemployment, crime and poverty problems."
While most developed and developing countries are smarting from the ongoing recession, South Africa is perceived by some analysts as relatively "immune" to the general economic malaise. How close to the truth is this perception?
"South Africa is in many ways well positioned to weather the current global economic and financial storm," Mr Ozturk said. "Its banking system is relatively insulated, free of toxic assets, and exports play a limited role in the economy, about 32 per cent of the gross domestic product. The country has a relatively strong fiscal position, and it has the capacity to increase expenditure into the downturn.
"On top of that, it can afford to pay for this expanding without igniting concerns over its credit standing. So these are our positives for the country."
Though South Africa may not be as exposed to the global financial crisis as European and US markets, Mr Ozturk admitted that the country already felt the impact of the global recession. "South Africa is closely integrated with the rest of the world. Any adverse effects from these mechanisms will mean a deterioration in economic activity. In the fourth quarter last year, the gross domestic product contracted by an annualised 1.8 per cent, quarter on quarter," he said.
High interest rates, inflation levels
He explained that high interest rates slowed down credit growth, high inflation levels affected private spending, property values and exports, and the slump in global exports hit the country's mining and manufacturing sectors.
South Africa posted 3.5 per cent growth last year while other places suffered recession, but this does not mean the emerging market remains recession-proof. The country's new president Jacob Zuma has said the "days of the state remaining aloof from the market are now gone".
"The central bank governor said that in the next two or three quarters we will have negative gross domestic product growth, which means that technically we'll be in a recession," Mr Ozturk added.
This is contrary to the optimistic outlook of South Africa's finance ministry, which believes that the country will perform better towards year-end.
"The finance ministry is more insulated from the rest of the world in terms of what they are doing," he said. "I think what the central bank governor said was more in line with what's going on in the real economy and the rest of the world. From this point of view, we expect South African growth to slow down sharply this year, after expanding in 2008."
"The main reason for this is that domestic demand will likely be subdued as households and corporations try to digest two years of interest rate hikes, while the private sector is suffering from weak asset and property prices. Vehicles sales are in free fall. Retail sales have contracted since the second quarter of 2008."
Mr Ozturk believes that the economy requires a boost through the launching of infrastructure projects and steady government expansion.
"We expect growth from public spending and public infrastructure projects," he said. "These will be the only source of growth this year and next year. Our current expectation for 2009 is around one per cent growth. But I have to say that there was downsizing in the first two months of this year. A downsizing strategy was drawn up in manufacturing output, and a 12.8 per cent decline in mining production was noted in February. All this suggests that the economy should enter negative territory this year.
"By the way, the International Monetary Fund says in its latest global outlook report that it expects South Africa to fall into recession this year, but a very minor recession, like -0.3 per cent. I think this is in line with expectations of what is going to happen in the economy.
"For the next year, growth is forecast to rebound to around 2.1 per cent. This is our current forecast. This is being driven mostly by public sector infrastructure spending and projects related to the FIFA World Cup tournament. There will be a tournament next year and it will probably be a big boost to services and tourism, while enhancing employment opportunities. Declining interest rates should bolster private consumption. These are the positives for next year."
As an emerging market, South Africa compares very favourably with other economies in Eastern Europe, the Middle East and Africa.
"In terms of growth, South Africa is expected to outperform many markets in the region, including Turkey, Central and Eastern European countries," Mr Ozturk said.
The government is going to make a significant investment in infrastructure growth. This will support growth and employment in the short term.
"The country's fiscal balance is very favourable compared to other countries. Most of the countries in the region have fiscal deficits. They have limited room to expand their spending to shore up their domestic growth. This is not the case with South Africa. The government is going to make a significant investment in infrastructure growth. This will support growth and employment in the short term. The room for fiscal loosening is South Africa's competitive advantage."
Bleak manufacturing growth
For many, South Africa is synonymous with precious metals and diamonds. Indeed the country is the world's biggest exporter of gold and platinum. However, the mining sector accounts for only 5.6 per cent of the gross domestic product in terms of production. And although the country's agricultural output saw a huge leap in 2008, with 18.8 per cent growth, year on year, agriculture accounts for only 2.3 per cent of the total GDP. The big revenue-bringer is the manufacturing sector, but this sector is performing far below par.
"Mining and agriculture are important sectors for employment," Mr Ozturk said, "but if you look at the overall picture, they represent only a part of the big picture. They will affect negatively, but they will not be the main drivers of negativity.
"What is really worrying is the massive contraction in the manufacturing sector. The -21.8 annualised figure, quarter on quarter, does not bode well for the economy. Previously, it had a big share of the output, something like 16.3.
"The outlook for the manufacturing sector is bleak because external and internal demand is waning. This may be a bit negative for the country in the coming years.
"The biggest hit this year will come from consumer spending and exports, but mainly from the former. Consumer spending accounts for more than 60 per cent of gross domestic product. It will remain subdued, with protractedly high interest rates and inflation and deteriorating rate growth and consumer confidence.
"On top of that, exports are expected to drop by 8.5 per cent this year. Exports account for 30 per cent of the GDP, so this will also have an effect on headline growth. But as I mentioned before, the main stimulus to growth will come from government spending on public infrastructure investments. These will help South Africa hold up in the midst of the global recession."
Kubilay Ozturk
Kubilay Ozturk, a London-based economist for Emerging Europe, Middle East and Africa, joined the HSBC Group in 2007. He had previously worked with HSBC's Global Economics and Quantitative Research teams.
Mr Ozturk received a Master's degree in economics from the London School of Economics, where he also taught an undergraduate-level course in macroeconomics. He received a Bachelor of Science degree in economics and finance from the Middle East Technical University.
What's behind the shirt? HSBC sponsored The British & Irish Lions
HSBC, the shirt sponsor and principal partner to the British & Irish Lions South Africa 2009 tour, is an active sponsor for the sport professionally and at the community level through its grassroots rugby programmes. Its TAG Rugby programme in South Africa aims to introduce children to the sport and hopefully keep them off the streets. TAG rugby is also an integral part of HSBC South Africa's corporate sustainability programmes that address development concerns such as education, livelihood generation, and environmental awareness.
Visit The British & Irish Lions Tour 2009 website for the tour report.
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