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The Risks of South Africa's Weak Economic Growth

13 March 2024 Riskonet

Considering new economic growth figures for Q4 2023, which stand at a dismal 0.1%, Volker Von Widdern, the Risk Principal of Riskonet Africa says business now needs to consider and plan for two key medium-term risks.

As South Africa faces ongoing high interest rates to curb inflation and maintain the value of the Rand against major currencies, he says the cost of servicing existing debt remains high.

This situation he believes limits the government's fiscal flexibility and increases the burden on the national budget, potentially leading to further debt accumulation if not managed carefully.

Secondly high interest rates, while aimed at controlling inflation, also deter new investments by making borrowing more expensive. This lack of investment stifles economic growth, reduces employment opportunities, and limits the country's ability to increase its productive capacity. Furthermore, without substantial growth investments, the South African economy risks remaining stagnant, with a diminishing capacity to handle additional debt and facing a further depreciating currency.

"The actual growth rate over the past two years has significantly lagged behind forecasts, with growth ranging from 0.5% to 1%, against expectations of 1.5% to 2%," notes Von Widdern. "While many emerging economies have bounced back post-Covid, South Africa's economic recovery has been sluggish, a fact that is often misattributed to the pandemic by the state. This misdirection fails to address the root causes of our economic stagnation, notably the low levels of investment in fixed capital formation."

Von Widdern stresses the disconnect between sector-related growth reviews and proactive, growth orientated economic policy that encourages major capital projects in a variety of industries. .

Drawing parallels with countries like Brazil and Turkey, Von Widdern elaborates on the consequences of varying approaches to interest rates and inflation control, and their impact on economic growth and currency valuation. "The situation in South Africa necessitates a strategic pivot towards attracting new forms of capital investment that align with growth projects, which in turn could strengthen our currency, boost our economy's productive capacity, increase employment, and lower import costs," he says.

Von Widdern adds that to reduce the debt-to-GDP ratio effectively, South Africa must focus on accelerating GDP growth rather than solely managing debt through expenditure controls. " What we need is a proactive strategy that aims to add $40 billion to the economy as swiftly as possible by tapping into international capital seeking fair returns. South Africa is ripe with opportunities once we eliminate existing barriers to investment," he says.

In that respect risk managers says Von Widdern should ensure that their Enterprise Risk Management Frameworks include appropriate assessments of economic risks, engage in comprehensive scenario planning that accounts for various economic conditions, including prolonged high-interest rates, varying levels of government debt, and different rates of economic growth. This planning should aim to forecast potential impacts on their organisation's financial health and operational stability.

Organisations should also look to improve their financial flexibility by diversifying their sources of financing. This includes seeking alternative financing options that are less affected by prevailing high-interest rates, such as equity financing or tapping into international capital markets that may offer more favourable terms.

Risk managers should also consider the importance of engaging with policymakers or industry groups to advocate for economic policies that promote investment, economic growth, and financial stability. This he says could involve supporting initiatives that aim to lower interest rates, reduce barriers to investment, or improve the investment climate in South Africa.

“Continuous monitoring of external economic indicators is critical for risk managers to anticipate shifts in the economic environment. This includes tracking interest rate movements, inflation rates, GDP growth figures, and other relevant indicators that could affect organizational strategy and risk exposure.”

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