Econometrix identifies skills shortage as a major stumbling block for SA economy

19 September 2007 Econometrix

The escalation of organized and violent crime is currently posing a big threat to the long-term wellbeing of the South African economy because it has the potential of further reducing an already weak skills base.

Dr Azar Jammine, director and chief economist at Econometrix, says every effort should be made to contain negative influences like crime, especially since the South African economy is currently experiencing its most exciting growth phase since the 1960s.

"The annual growth rate has averaged 4.1% since 1999. Not since the 60s have we been able to sustain economic growth at a rate higher than 3.5%," notes Jammine.

"But if the crime rate is not curbed it has the potential of slowly killing South Africa's long-term future by forcing large scale emigration of skilled South Africans."

Celebrating the 25th anniversary of Econometrix this week, Jammine says looking back the South African economy has successfully overcome many hurdles and delivered stellar performances.

Hurdles of the future

Jammine says looking forward, growing a sustainable skills base is one of the big challenges facing South Africa.

"A shortage of skills will stunt our growth, maybe not in the next five years, but over the long-term. In the longer run South Africa will not be able to fulfill its full potential if there is a critical lack of skills."

He points out that the economy is increasingly being supported by its tertiary sector, which includes industries such as finance, property and business services, transport, storage, and communications. But these industries rely on skilled labour, which is already in short supply.

In addition, South Africa also needs to ensure that its ambitious infrastructural roll-out plans dont outrun the supply of resources such as capital, labour and skills. 

"With the upswing in economic growth, we are also seeing investment spending not experienced since the 60s. Upgrades of our transport system, preparing for the Soccer World Cup and revamping Government departments, while necessary, should not exceed our resource capacity." 

Future growth

Jammine finds it surprising that the South African economy and local financial markets have thus far ignored the increasing crime threat. But equally unbelievable, says Jammine, is that markets have also not reacted to the uncertainty around who will be South Africas next President, just as they have shrugged off the situation in Zimbabwe and South Africa's BEE debate.

"For now the South African economy keeps on growing despite a number of serious factors close to home that could have the potential to derail current growth," comments Jammine.

He says this shows that South Africa is relying heavily on foreign factors to keep the fires burning. The recent stock market volatility triggered by the US subprime crisis, for example, shows that South Africa is therefore also vulnerable to outside influences.

Running on foreign fuel

According to Jammine the SA economy remains highly dependent on foreign inflows, promoting growth through imports rather than local production. The same is true for the stock market and the bond market, which continue to attract foreign capital.

"The world is currently experiencing a liquidity glut, causing investors to take chances. And SA presents an interesting bet for these investors. It is fairly stable and offers liquidity, which unfortunately also enables these investors to dump stocks and flee at the slightest sign of volatility."

Calling the markets

Jammine, who has accurately forecast a number of substantial market corrections over the past 25 years, was not surprised by the intensity with which the US subprime crisis hit the local equity market.

"We predicted a short and sharp market correction for South Africa. We are now in a period of consolidation, but I am far from convinced that we are going to new highs from here."

Jammine says despite having enjoyed an incredible run the local stock market is not overpriced. But an implosion of world credit has the potential to depress the local markets.

"Our market has enjoyed the most incredible run, but we could end up paying for it. I believe we are in for some nasty times in the next year or so. Worldwide we are seeing a huge build-up of debt, and this has the potential to slow down world economies."

The rand as the wild card

Econometrix earned its stripes over the past 25 years with the uncanny accuracy of its forecasts.

Tony Twine, director and senior economist at Econometrix, says in the early 1980s mockery quickly turned to admiration in many boardrooms when it became clear that Econometrix had correctly predicted that the rand/dollar exchange rate was about to tumble.

"We explosively hit boardrooms and the media by correctly predicting the looming sharp weakening of the Rands external value. In 1982, the year that Econometrix was established, one rand was worth one dollar. Three years later, the rand was worth 38 US cents. But in line with our prediction the rand dropped to R3 per US$ towards the end of the 80s. And it continued to fall deep into the 90s."

Twine says this caused the Reserve Bank to react and the interest rate shot up from 18% to 25% in 1998 between June and August that year.

A run on the rand during 2001 saw it crash from R5.96 to R13.85 to the US dollar.

After that we saw the rand strengthen against major currencies for five years in a row. It gave up a little last year, but has settled in the R7 to the dollar range. 

Twine says since those traumatic days the rand has consistently proven that it can strengthen as easily as it can weaken.

Between 1979 and 2001 the rand only ever weakened and all investors had to do was guess by how much. Now the rand may move against you as easily as it may move in your favour. It makes doing business that more interesting.


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