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State of the South African economy in 2015

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Kathy Gibson reports from Oracle CIO Summit in Sandton – South Africa looks like a more attractive exporter than it did just one year ago – but there are still massive challenges facing the economy.

That’s the word from Nenad Pacek, president of Global Success Advisors, who says there are several pieces of good news, one of the major export markets is the Euro zone, and it is showing signs of life. This year it looks like growth will be about 1,6% growth.

“The bad news is that South Africa is growing relatively slowly, but at least the Euro zone is showing signs of life, Pacek says.

In Europe, the threat of deflation is gone now that more money is being printed. In addition, employment is up, so people are able to buy more. Governments are able to borrow at cheaper rates which is also driving growth. And, at the same time, banks are beginning to lend again after six years of no growth. “This is expected to accelerate thanks to stimulation from the central banks.

“So it’s turning around, and considering the size of exports from South Africa to Europe, this is important,” says Pacek.

“In fact the Eurozone is about 30% of global GDP, so growth is beneficial for all markets.”

Another piece of relatively good news, he says. is that the US will grow at about 2% this year. At another 25% of global GDP, many other markets will do well at the same time.

“There threat to South Africa is their link to US monetary policy. A raising of interest rates will have an impact on South Africa and all emerging markets as liquidity drives up to a certain extent.”

A negative for South Africa is that the money supply to the big four private banks will be constrained by rising US interest rates, so lending growth may slow. “And banks might get pickier in terms of who they give their money to.”

Emerging Asia is still good news, Pacek adds, with a growth rate of 6% to 8%. “This is where South Africa should be,” he adds.

“The only thing is that China, also a big driver of global growth, is now down to about 7% growth and this may fall further. The issue of China buying less commodities from the rest of the world and especially Africa is relevant.”

Over the next five to 10 years, China will look to redirect its economy, and the demand for commodities will be lower.

“Speaking of commodities, we are still in a global downturn, which is not good news for South Africa,” Pacek says. “At the moment we are in a bit of a panic cycle with commodities traders dumping their portfolios. These cycles are always there, so there will be an upturn in global commodities prices.”

The oil price could rise soon, he adds, and this is not great news for South Africa. However, a rise in commodity prices will be good news for mining exporters.

Sub-Saharan Africa overall looks good, but more than half of companies operating in Africa report that they are behind on their budgets, mainly as currencies are down on the back of the commodity price drops.

Many southern African currencies have been exposed to this, particularly the South African rand, which is still trading at multi-year lows.

“But overall, sub-Saharan Africa has been disappointing, growth rates are still good compared to South Africa, but are lower than expected.

“For most of our clients sub-Saharan Africa is usually just 1,5% of its sales, although many are looking for ways to conquer Africa is a managed way.”

A threat to South Africa, based on a customer survey, that 49% of multinational have already moved the MEA headquarters to Dubai, with the Johannesburg office downgraded. Another 17% of clients will dot he same thing in the next 12 months.

“Dubai is very aggressive in attracting foreign companies, and more companies are moving sub-Saharan African headquarters to Dubai. Many are also having India and even Russia CIS reporting into Dubai.

“It is becoming an interesting emerging market hub partly at the expense of Johannesburg.”

South African manufacturing has been struggling and is still gradually shrinking. “This is not good news,” says Pacek. “Any country that de-industrialises usually ends up poor, I think it is on the verge of doing that, unless the government does something.”

Strikes and above-inflation salary increases are helping to shrink the manufacturing sector and driving foreign companies away from the country. Some big companies are thinking of shutting down South Africa as a manufacturing hub, says Pacek.

“It is a serious threat. These days companies can choose where to go and they are choosing easier locations.

“If you don’t have an industrial strategy designed by the government you do not have a prosperous future ahead.”

Despite massive reserves, mining is shrinking and this is also of concern Pacek says.

Companies doing business in South Africa are also seeing disappointing results, with 2014 the worst year for profitability, says Pacek.

“Add it all up, in a market that grows just 1,5%; I would be surprised if it grew faster this year. The only positive is the European recovery.

“Issues relating to manufacturing, strikes, mining and others its hard to see what will help to drive growth higher,” he adds. And, if South Africa has a population of 80-million in he next decade, Eskom will have to take electricity generation seriously.

Despite the rand’s current weakness, Pacek believes it could still be somewhat over-valued

In a country with its own currency and central bank, Pacek says he is surprised that the Eskom crisis cannot be alleviated with quantitative easing to build power station.

“This is how China did it. They built infrastructure and power plants that they are enjoying today.

The developed world uses quantitative easing when the economy is battling, he says, and it could also help to employ more people.

The bottom line for economic growth, Pacek says, is that big strategic projects need to be designed and driven by government – although they will largely be carried out by the private sector.