Sub-Saharan Africa (SSA) is the second fastest growing region in the world today, trailing only Asia, according to the International Monetary Fund (IMF). However, growth has been sluggish in South Africa, Africa’s largest economy, as a result of the ongoing depression in the Eurozone and labour unrest within South Africa’s mining sector. South African businesses have lost an estimated US$ 15 billion in revenues as a result of the ongoing Eurozone crisis, which is estimated to have wiped US$ 2 trillion off company revenues globally.⁽²⁾

Renewed distress in Europe, South Africa’s main trading partner, has slowed South Africa’s growth due to declining demand for exports from South Africa.⁽³⁾ Economic output of South Africa will take longer to reach potential than earlier envisaged, reflecting the global slowdown, and South Africa’s growth is likely to remain lacklustre in the medium term.  South Africa’s sluggish growth has raised questions as to whether SSA can increase, or at least maintain, the momentum of growth to sustain investor confidence in the region, and also attract the necessary investment to boost the region’s infrastructure shortfalls to drive economic development. This CAI paper discusses the impact of South Africa’s sluggish growth on SSA.

Structural transformation of the South African economy

The economy of post-apartheid South Africa began undergoing structural changes in the mid-1990s. This followed years of economic sanctions and international isolation that finally began to take their toll in the 1980s, worsening in the early 1990s. As investment dried up and the apartheid state suffered balance of payments crises, economic growth slowed to an average annual rate of 2.2% in the 1980s from 3.5% in the 1970s. The economy contracted by 3.1% between 1990, when political prisoner Nelson Mandela was freed after 27 years in jail, and 1993, the year before the first democratic elections that brought majority rule to the country. In 1994, Mandela’s African National Congress (ANC) government began a series of reforms that would have a profound impact on the structure of the economy and labour markets. These included trade, industrial and financial sector reforms, all of which were aimed at making the country competitive as it reintegrated into the global economy.

South Africa emerged post-apartheid into a hostile economic order for developing economies. The IMF and the World Bank bailed out debt-ridden South Africa on condition it adopted neoliberal economic policies, including privatisation, labour flexibility, trade deregulation, and decreased public spending. On coming to power, the ANC government inherited ZAR 30 billion (US$ 3 billion today) in debt from the apartheid government, albeit alongside relatively sophisticated financial and physical infrastructure.⁽⁴⁾

These structural reforms cemented the economy and laid the groundwork for preserving it from recession during the 2007-2008 global meltdown and the 2008-2012 recession in the developed world.⁽⁵⁾ South Africa’s financial markets, however, remain vulnerable to risk aversion and institutional deleveraging, a process employed by investors, financial institutions, businesses and governments to reduce the amount of borrowed capital in place.

When the 2007-2008 global financial crises struck, South Africa was going through a period of internally correcting vulnerabilities, albeit with a well developed and soundly regulated financial system which enabled local currency borrowing and mitigated the shocks from the recession. Nevertheless, it faced challenges in the form of extremely high unemployment, inequality, widespread poverty, high crime and HIV/AIDS incidence, underperforming agricultural and mining sectors, a struggling manufacturing sector, a widening current account deficit, high and fast-rising household debt, and growing energy shortages.

Regional integration and cross-border trade

Investors from Europe, Asia and the United States (US) are not the only ones chasing growth opportunities in Africa these days – Africans themselves are waking up to potential across borders within the continent. According to the London-based auditing firm Ernst & Young, intra-African investment into new foreign direct investment (FDI) projects in Africa grew at an annual compound 23% between 2003 and 2011.⁽⁶⁾ Since 2007, that rate has increased to 32.5%, more than double the growth in investment from non-African emerging markets, and almost four times faster than FDI from developed markets.⁽⁷⁾

The South African Government is playing an active role in negotiations to accelerate regional economic integration among the tripartite trade blocs of the Southern African Development Community (SADC), East African Community (EAC), and Common Market for Eastern and Southern Africa (COMESA). These groups together cover 26 countries that account for 56% of the continent’s population. South Africa dominates the region economically, accounting for 41% of SADC’s total trade and about 63% of its GDP.⁽⁸⁾ South Africa has the requisite economic capability and levels of diversification to drive economic integration in a manner that is mutually beneficial to the region. However, as mentioned, the country faces high levels of poverty, inequality and unemployment, despite strong economic performance over the past decade relative to recessionary conditions in developed markets.

South Africa has consistently run a trade surplus with Africa since 1994. This surplus increased from just ZAR 6.3 billion (US$ 625 million at current exchange rates) in 1994 to a massive ZAR 47.35 billion (US$ 6.7 billion) in 2011, as declining demand from the Eurozone compelled South African exporters to explore regional markets within Africa. The surplus declined to ZAR 40.86 billion (US$ 4 billion) in 2012, reflecting output contraction on the back of labour unrest within mining and manufacturing sectors. The trade surplus – an economic measure in which a country’s exports exceeds imports, representing a net inflow of domestic currency from foreign markets – is driven mainly by increased exports to the DRC, Mozambique, Zambia and Zimbabwe over the past two decades.⁽⁹⁾

Heightened worries about stagflation

The year 2012 was one of the most turbulent in South Africa’s post-democratic dispensation, as labour unrest in the mining sector crippled production and recession deepened in the country’s major trading partner, the Eurozone. South African GDP growth slowed two percentage points in 2012 to US$ 384.3 billion as export volumes barely expanded and consumer spending waned on the back of rising unemployment.⁽¹⁰⁾ The start of 2013 was even worse as GDP growth slowed to an annualised 0.9% in the first quarter, from 2.1% in the fourth quarter of 2012.

Credit rating agencies have consistently downgraded South Africa’s investment grades since the Marikana massacre in August 2012, citing uncertainty around policy direction, labour unrest, decline in output, and weak demand from the Eurozone, which absorbs 30% of South Africa’s exports.⁽¹¹⁾ The rating agencies have kept South Africa on a negative outlook, which means further ratings downgrades are possible if there is no improvement in socio-economic conditions, which would clearly have significant long-term implications and exacerbate capital flight by risk-averse investors.⁽¹²⁾ South Africa is currently on the rating agencies’ third lowest investment grade level, paring with Mexico, Russia and Thailand.⁽¹³⁾

The current economic situation of South Africa holds worries of stagflation, defined as a combination of rising unemployment, sluggish domestic growth, and increasing prices. The debt crisis in Europe is threatening to derail the global economic recovery as the Eurozone recession saps demand for manufactured exports, while mining strikes curb South Africa’s economic output. Consequently, South Africa’s jobless rate dropped slightly from 25.2% to 24.9% towards the end of 2012, but by June 2013, it had risen to 25.6%, one of the highest unemployment rates among emerging markets. The South African manufacturing sector, which accounts for about 15% of GDP and is highly reliant on the mining sector as the cornerstone of the economy, shed 18,000 jobs in the first quarter of 2013 alone, whilst the agricultural and services sectors shed 26,000 and 22,000 jobs respectively.⁽¹⁴⁾

The outlook for 2013 is bleak as Anglo American Platinum (Amplats) announced that it is planning to close two mines and lay off 3,300 workers – although this is significantly less than an earlier proposal in January 2013 to shed 14,000 jobs.⁽¹⁵⁾ With social unrest having spread to agriculture, growth in this sector is also expected to slow in 2013. Output has furthermore slowed in the services sector, with industrials the only sector to have accelerated growth. The manufacturing sector grew 2% despite weak export markets, led by the robust performance of the domestic automotive sector, which has benefitted from government incentives.

South Africa’s central bank, the Reserve Bank, also faces a monetary policy dilemma because inflation is being stoked by a softer rand while economic growth is weakening, making it difficult for policy makers to cut the benchmark interest rate from 5%.⁽¹⁶⁾ The Reserve Bank in May 2013 cut its economic growth forecast for the year to 2.4% from 2.7%, and projected economic expansion of 3.5% in 2014. The Bank has kept the repurchase rate steady since July 2012, on concerns that a weaker rand and higher wages will push inflation above its self-imposed 3%-6% target.⁽¹⁷⁾

South Africa’s balance of trade deteriorating on weak external demand from Eurozone

South Africa’s trade balance deteriorated sharply in 2012, with a deficit of approximately ZAR 118 billion (US$ 11.8 billion today), due to weak external demand from the Eurozone. Overall exports grew by a mere 0.8% in nominal terms in 2012, against growth in imports of 14.6%. The trade deficit widened markedly from R16.9 billion in 2011. Within the European Union (EU), five countries absorb over 80% of South Africa’s total exports to the Eurozone: Belgium, Germany, Italy, the Netherlands, and the United Kingdom (UK). The German economy has avoided recession, but is under significant pressure given its strong ties with the rest of Europe. South Africa’s exports to Greece, Portugal and Ireland, the worst-hit of the Eurozone economies, together comprise less than 0.5% of total South African exports to Europe. The country’s exports to Europe are a broad-based mix of agricultural products (fruits and vegetables), wines and beverages, motor vehicles, precious metals and stones, as well as various types of machinery and electrical equipment.

A welcome development for South Africa was a 20.4% increase in merchandise exports to the rest of Africa in 2012, taking the continent’s share of South African exports to almost 18%, or ZAR 128 billion (US$ 12,8 billion) out of a total of ZAR7 18 billion (1.8 billion). However, imports from Africa grew faster than exports to Africa, with imports rising by about 43% to ZAR 82.8 billion (US$ 8.2 billion)  from ZAR 57.8 billion (US$ 5.7 billion) in 2011. In both instances, South Africa’s trade with the rest of Africa expanded at a substantially faster pace than that with the Eurozone. Nevertheless, reduced output volumes from South Africa’s domestic mining sector kept exports to other African countries below potential.

There seems to be some good news from the Eurozone as some of the economies at the centre of the crisis – Greece, Italy and Spain – continue to contract at a slower pace than previously, and Portugal has returned to growth after more than two years of declining economic activity.⁽¹⁸⁾ GDP in the Euro area rose 0.3% in the three months to June 2013, led by expansions in Germany and France, ending a six-quarter streak of contractions.⁽¹⁹⁾ This is good news for South Africa, after its exports to the EU fell from a third to 23% of total exports in 2012.⁽²⁰⁾

South African exporters have managed to adapt to changing global circumstances as reflected in export destinations since the global financial crises. South African exports to emerging Asia, which includes China, India, Indonesia and Taiwan, grew to 35% of the total in 2013, lifted from 23% in 2000.

Figure 1: South Africa's exports by region (% of gross exports)⁽²¹⁾

South Africa’s role in Sub-Saharan Africa’s growth prospects

World Bank data reflected a sustained strong growth momentum in SSA in 2012, despite the economic challenges facing its largest economy, South Africa. Excluding South Africa, growth in SSA is forecast to average 6% in the medium term, bolstered by rising output and exports from resource-rich frontier economies like Ghana, Mozambique and Nigeria, as well as other economies such as Ethiopia, Rwanda and Tanzania.⁽²²⁾

GDP in SSA countries grew 5.5% in 2011 but slowed to 4.9% in 2012 due to weaker growth in the region’s two major economies – South Africa and Nigeria. By comparison, the US grew 1.8% in 2011 and 2.2% in 2012, while the EU grew 1.8% in 2011 and contracted 0.6% in 2012.⁽²³⁾ SSA’s impressive growth has attracted massive capital inflows into Africa – total external financial flows hit a record high of US$ 186.3 billion in 2012, up from US$ 158.3 billion in 2011, and are projected to reach US$ 200 billion by the close of 2013.⁽²⁴⁾

The IMF has recently trimmed its growth forecast downwards for SSA, citing weaker external demand and domestic problems with the region’s largest economies – South Africa and Nigeria. Nevertheless, the slow growth of the US economy, coupled with the complicated state of the Eurozone, makes SSA an attractive investment destination. In 2012, South Africa accounted for 29.8% of SSA’s GDP of US$ 1.288 trillion.⁽²⁵⁾ South Africa and Nigeria together account for 56% of SSA’s GDP – which is equivalent to 28% of China’s GDP, 69% of Brazil’s, 75% of Russia’s and 80% of India’s.⁽²⁶⁾

There are concerns whether SSA can increase the current impressive growth rates to deepen investor confidence in the region, particularly in light of South Africa’s sluggish growth. While the South African situation will be a drag on SSA growth, favourable commodity prices are likely to bolster trade in fast-growing frontier markets within the region. This is likely to be sufficiently strong to counter South Africa’s lacklustre performance to sustain current growth rates.

The majority of SSA’s economies rely heavily on commodity exports for growth, except for South Africa which boasts a vibrant manufacturing industry in addition to mineral and agricultural resources. While commodity prices have been generally volatile in recent years, they are on the whole higher than during the recessionary conditions that followed the global financial crisis of 2008. The price of oil averaged US$ 105 per barrel in 2012, virtually unchanged from US$ 104 in 2011.⁽²⁷⁾ However, this was 70% higher than the price recorded during the global recession in 2009 and 8% above the 2008 average, prior to the global recession. The price of gold is equally volatile, reflecting fears about the debt crisis in Europe, as well as inflation, as gold commonly serves as an investment hedge. SSA accounts for almost a third of the world’s gold production. South Africa is Africa’s largest producer of gold, followed by Ghana. However, several other African countries (Burkina Faso, Côte d’Ivoire, Guinea, Mali, Mauritania, Niger, Senegal, Sierra Leone, Tanzania and Zimbabwe) also produce and export gold in sizeable quantities.⁽²⁸⁾ Prices of other metals have also softened but they are still relatively high to spur economic growth and generate foreign exchange in producing countries.⁽²⁹⁾

Concluding remarks

Thanks to strong emerging trade relations with Asia, and cross-border trade within Africa, South African exporters now have a diverse market for exports and this, to some extent, has mitigated the impact of sovereign debt crises in the Eurozone on the domestic economy. Internal labour agitations within South Africa and consequent declines in output, however, remain a drawback to economic activity reaching full potential.

SSA will continue to attract massive capital inflows, at least in the medium term, as the complicated state of the economies of the Eurozone and the lacklustre growth of the US compel investors to seek growth opportunities in frontier markets in Africa and Asia. South Africa’s slow growth is a setback to the overall growth of the continent, but current buoyant commodity prices will drive growth in the rest of SSA to retain investor confidence in the region in the medium term.

Written by Samuel Amanor ⁽¹⁾

NOTES:

(1) Samuel Teye-Larbi Amanor is a Research Associate with CAI and an Africa-focused financial and economic analyst. Contact Samuel through Consultancy Africa Intelligence's Finance & Economy unit ( finance.economy@consultancyafrica.com). Edited by Nicky Berg.
(2) ‘Euro zone crisis biggest risk for 2013’, South African Info, 7 August 2012, http://www.southafrica.info.
(3) McDonald, C. and Canales-Kriljenko, J., ‘Distress in Europe slows South Africa's economic recovery’, International Monetary Fund (IMF), 6 September 2012, http://www.imf.org.
(4) Lizia, F., ‘Keys to the house, but no code to the safe’, Sydney Globalist, 30 January 2013, http://thesydneyglobalist.org.
(5) Seria, N., ‘South Africa says Moody’s recession claim ‘alarmist’’, Bloomberg, 9 July 2008, www.bloomberg.com.
(6) Sulaiman, T., ‘Africa investments – from FDI to AIA: Africans investing in Africa’, Reuters, 8 August 2013, www.reuters.com.
(7) Ibid.
(8) ‘South Africa’, African Economic Outlook, 9 August 2013, www.africaneconomicoutlook.org.
(9) ‘Darmalingam, S., ‘South Africa: Trade special report. Part III: SA trade picture—Europe tripping up’, Standard Bank Research, August 2013, https://research.standardbank.com.
(10) ‘South Africa’, World Bank, August 2013, data.worldbank.org.
(11) ‘South Africa’s Marikana mine closed down by intimidation’, BBC, 27 August 2012, http://www.bbc.co.uk.
(12) ‘Head to head - What the recent credit rating downgrade mean for investors’, Invest SA, 7 February 2013, http://www.investsa.co.za.
(13) Brand, R., ‘Moody’s affirms South Africa’s Baa1 rating on fiscal discipline’, Bloomberg, 18 July 2013, http://www.bloomberg.com.
(14) Martinez, A. and Mbatha, A., ‘South African second-quarter jobless rate rises to 25.6% (1)’, Bloomberg Businessweek, 30 July 2013, www.businessweek.com.
(15) ‘Amplats to sack 3,300 workers’, Mining Journal, 30 August 2013, www.mining-journal.com.
(16) Martinez, A. and Mbatha, A., ‘South African second-quarter jobless rate rises to 25.6% (1)’, Bloomberg Businessweek, 30 July 2013, www.businessweek.com.
(17) Wild, F. and Cohen, M., ‘South Africa’s GDP grows at slowest pace since recession’, Bloomberg, 28 May 2013, http://www.bloomberg.com.
(18) Walker, A., ‘The Euro-zone is growing again, but don’t pop any corks yet’, BBC, 14 August 2013, www.bbc.co.uk.
(19) Tschampa, D., ‘Europe car market begins recovery as recession concludes’, Bloomberg, 15 August 2013, http://www.bloomberg.com.
(20) ‘Darmalingam, S., ‘South Africa: Trade special report. Part III: SA trade picture—Europe tripping up’, Standard Bank, August 2013, https://research.standardbank.com.
(21) Ibid.
(22) ‘Africa overview’, World Bank, August 2013, www.worldbank.org.
(23) ‘World economic outlook update’, International Monetary Fund (IMF), 9 July 2013, www.imf.org.
(24) ‘Foreign investment, aid, remittances and tax revenue in Africa’, AfDB, OECD, UNDP, ECA, August 2013, www.africaneconomicoutlook.org.
(25) ‘South Africa’, World Bank, August 2013, data.worldbank.org.
(26) ‘50 factoids about Sub-Saharan Africa’, World Bank, August 2013, web.worldbank.org.
(27) ‘Trade policies and regional integration in Africa’, AfDB, OECD, UNDP, ECA, August 2013, www.africaneconomicoutlook.org.
(28) Ibid.
(29) Ibid.