2013: A watershed year for South Africa

2013 will unquestionably be a watershed year for South Africa in economic terms. We are either going to make a deliberate and urgent effort to get onto the high road to faster economic growth, job creation and exuberant confidence through strong leadersh

While the extended outlook for South Africa’s economic growth continues to be fairly stagnant, and the economy will again struggle to grow throughout 2013, we do expect the new year to be a better o­ne than 2012, when various disruptions exacted a heavy toll o­n the economy. We now see GDP growth at around 2.7% for 2013, slightly better than the 2.3% in 2012.

Going into 2013, although the weaker rand will help to boost exports and tourism and lend some protection to companies competing with imports, rising cost structures may erode the benefit. And despite low interest rates, people are generally still quite heavily indebted, job creation is very slow and incomes are being eroded by sharply rising prices of electricity, fuel and other administered prices, such as municipal rates and taxes.

There is also a high probability that effective tax rates will have to rise this year to make up for sluggish revenue growth, recognising that the government should be mindful not to further undermine an already slow-growing economy and fragile consumer.

Global risks have moderated, but remain high
A high degree of risk still clouds the global outlook, even though concerns appear to have moderated in recent months. The South African economy and local stock market have both demonstrated resilience in this uncertain global environment, but prospects have undeniably deteriorated due to the wave of labour unrest, serious production disruptions in many industries and growing pessimism about the longer-term outlook for the economy. The lack of any clear fundamental driver(s) of economic growth (key among which is our fundamental lack of international competitiveness) is of particular concern.

Higher food and energy prices have pushed inflation back to close to the upper end of the 3%-6% inflation target. The recent sharp weakening of the rand will raise the cost of imported goods, while last year’s generous wage increases will further compel businesses to raise prices in 2013, so we do not see inflation moving back to the middle of the inflation target range any time soon.

Budget and trade deficits key risks
Another concern is the still-large budget deficit. Although government plans to reduce the deficit over the next few years, this will be difficult to do given ever-mounting pressure for more spending by government and lacklustre tax revenue growth o­n the back of a sluggish economy. Tax increases will be required to keep the deficit at bay, dampening economic prospects even further.

Then there is the large deficit in our trade with the rest of the world, driven by disruptions in our key export industries last year, but, more importantly, reflecting our fundamental lack of international competitiveness. South Africa’s foreign trade shortfall runs into some $20bn yearly, a gap that must be plugged by foreign investors wanting to invest here. With last year’s events and concerns over SA’s longer-term prospects mounting, a significant risk for 2013 is that the capital inflows will dry up, catapulting the rand sharply weaker.

What South Africa needs over the medium term to propel the economy o­nto a higher growth path is a fundamental economic growth driver. There are potential candidates, such as a more efficient state bureaucracy, a renewed focus o­n infrastructure expansion by government (as opposed to the surge in current spending in recent years), and a more efficient and productive labour force. Unfortunately, turning these candidates into real performers will not come quickly or without much political teeth-grinding.

Low interest rates, weaker rand boost prospects
But not all is depressing. There are a few rays of sunshine peeking through a pretty cloudy environment. In the shorter term a moderately healthier world economy in 2013, combined with the weaker rand, will benefit export industries and tourism, while there are tentative signs that, after a few years of stagnation, infrastructure expansion by government is starting to gain momentum again. Hopefully 2013 will also see fewer interruptions to the local economy than 2012. Better labour relations will also be a great help. Finally, we expect interest rates to remain flat, with the prime rate steady at 8.5% for the entire year despite the weaker rand and inflation hovering around the top end of the inflation target range.

So the outlook is certainly not so bad that we should degenerate into o­ne of our perennial bouts of extreme pessimism. Indeed, the biggest hope for SA’s economic prospects emerged from what late last year was a key source of concern - the ruling ANC’s elective and policy conference in Mangaung. Besides the election of businessman Cyril Ramaphosa as deputy president of the party, fringe policy ideas, such as nationalisation, were finally laid to rest. Furthermore, the National Development Plan was accepted as the key guide of government’s policy thrust over the next two decades or so. This plan clearly spells out what is wrong in SA and what needs to be done. With effectively all opposition to the plan now out of the way, all that is required is energised politicians to drive the process.

Waiting for government…
In the shorter term, there is no denying that last year’s events deeply scarred sentiment regarding South Africa’s economic prospects, raising concerns over future political stability. Government urgently needs to put these fears to rest, while also demonstrating clear leadership and urgency in the implementation of business-friendly, growth-friendly and employment-friendly macro policies. Failing this, South Africa not o­nly runs the risk of falling off global investment radar screens, but concerns over fiscal, financial and social stability will mount relentlessly. This year should see a definitive move o­ne way or the other, and we hope it is towards faster growth.