The Rainbow Nation, the super heavyweight of the African continent, South Africa is treading cautiously through
the global economic slowdown.
Almost twice the size of Texas, South Africa has an abundant supply of natural resources. It is the world's largest producer of platinum, gold and chromium, and has the world's
17th largest stock exchange, natural beauty, and all the indices of a developed society.
Growth has been robust since 2004 but unemployment remains high, social inequities are growing and now an electricity crisis threatens to disrupt any semblance of a bull run.
The National Treasury, in its 2008-09 Budget Review, forecast four per cent GDP growth which is expected to rise to about 4.6 per cent by 2010.
Economic upswing Africa on the whole has been on an economic upswing. According to data released by many African countries the economy of the continent is in its healthiest period in three decades.
Africa is now "at its best period of sustainable development and low inflation," point out experts with the International Monetary Fund (IMF) who have been quoted in the African Review of Business and Technology.
Africa has achieved an average annual economic growth of more than five per cent over the past five years, with its 2007 growth reaching a record 6.2 per cent. Its annual growth rate of real per capita GDP soared to an impressive
3.6 per cent in 2003-2007 from a mere one per cent in the 1997-2002.
Africa's steady growth in 2007 had a lot to do with the economic stability of South Africa, Algeria, Nigeria and Egypt. Their GDP, according to economists, accounted for half of the continent's total.
Additionally, economies in five major regions on the continent - northern, eastern, southern, central and western Africa - registered impressive growth rates. Ghana and Tanzania also ranked among the top 10 countries in the world for its vibrant trade environment.
Despite this growth, South Africa is not out of the grip of the global economic meltdown. Tito Mboweni, Central Bank Governor, has warned consumers to "tighten their belts" as the targeted inflation measure reached a five-year high.
Mboweni pointed out that there was evidence that price pressures were not confined only to food and fuel. "The country needs to understand that the pursuit of prudent macro economic policies is critical to the perceptions of investors about South Africa.
Those perceptions will either help us to finance the current account deficit or we may have problems," he added. Mboweni, however, expressed confidence in the banking system and in South Africa's ability to tide the crisis.
"South Africa's banks are well capitalised and supervised, its financial system is robust, and liquidity in the domestic financial system is adequate," he said.
"Foreign debt is low, private banking sector owned more than 225 billion rand (about Dh105.7 billion) in foreign exchange at the end of 2007, and interest rate differentials, both nominal and real, continue to favour South Africa."
Rising reserves
The Central Bank's gross international reserves rose from $33 billion (about Dh121 billion) at the end of December 2007 to $34.2 billion (about Dh126 billion) at the end of February 2008.
"The South African Reserve Bank is closely monitoring international and domestic developments as they unfold, consults with relevant stakeholders and will be ready to take appropriate steps to ensure stability and a smooth functioning of our financial markets should that become necessary at any point in time in the future," he added.
Ratings agency Standard & Poor's agrees that the outlook for South Africa's banks is robust. In its report titled South African Banks Balance Robust Growth With Rising Risks in 2008
S&P noted that South Africa's banks have enjoyed strong growth in earnings over the past five years thanks to deregulation in the banking sector coupled with national gross domestic product (GDP) growth rates of five per cent
to six per cent.
It has also predicted that growth in South Africa's banking sector would "slow somewhat" in 2008 due to relatively high inflation and interest rates. But Jerome Chui, S&P Credit Analyst, believes that "with significant infrastructure
projects coming on stream, partly in preparation for the 2010 World Cup, we still expect this year to be a positive year for bank revenues."
Economic growth target
Trevor Manuel, Finance Minister, believes that South Africa will meet its economic growth target for 2008 despite the deepening global credit crisis.
"We are confident that we will meet the four per cent growth rate and that the economy will accelerate in the outer years
of our medium term horizon," Manuel said in a recent speech to parliament.
"The world economy is taking strain but our shock absorbers are helping to cushion against the worst effects of this crisis. We have what it takes to ride out the storm.
It is also evident that even the non-food and oil components of inflation are increasing and so, during this time of heightened turbulence, it is important that we continue to use inflation targeting as our anchor."
South Africa's economy shrugged off a slowdown in consumer spending to accelerate sharply in the fourth quarter of 2007 thanks to strong performances from the financial services and manufacturing sectors.
Uninterrupted upswing
This was South Africa's 33rd quarter of uninterrupted expansion in real GDP since September 1999 which has been the longest economic upswing in the nation's history.
Despite the global economic tumble hurting 2008 across
the board, Razia Khan, Regional Research Head
for Africa at Standard Chartered in London, believes that there remained a "healthy level of strength" in sectors like agriculture, construction and financial services that would sustain the economy through the electricity crisis.
According to a recent World Bank report, South Africa's reliance on portfolio investments to finance its current account deficit poses a risk to its economic outlook.
The report, dubbed Global Economic Prospects 2008, forecasts the current account deficit at more than seven per cent of GDP this year and next.
The report warns that a marked depreciation of the rand in the event of a sell-off of South African assets by non-residents would present the government with additional financial management issues to deal with.
The World Bank also projects that consumer demand will soften this year, with higher interest rates and an erosion of real incomes curbing real outlays.
Confidence in South Africa's retail sector tumbled to a five-year low in the first quarter of 2008, indicating a further decline in sales.
According to the Bureau for Economic Research (BER) the retail confidence index dropped to 52 from 71 in the last quarter of 2007, indicating that only a small majority of retailers were satisfied with business conditions.
Adds BER economist Linette Ellis, "Apart from rapidly deteriorating sales growth, the decline in overall retailer confidence can also be ascribed to increasing margin pressure and plunging profitability levels, and possibly the negative sentiment provoked by the recent spate of power failures."
The price rise was also taking a toll with selling prices for non-durable goods, including food, surging to a 51/2 year high. Ellis added that the BER now expected real consumer spending to increase by between two and three per cent in 2008, compared to an estimated seven per cent in 2007 and eight per cent in 2006.
Weathering the storm
Despite the darkening clouds, South Africa's economy is expected to weather the storm. The budget has been in surplus, government debt has melted to about 30 per cent of GDP, and foreign-exchange reserves have more than doubled since 2004.
According to the Economist Intelligence Unit, the government's Accelerated and Shared Growth Initiative for South Africa (ASGISA) promises to focus on boosting economic growth and investment in an effort to generate employment and reduce income disparities.
The spotlight will remain on building infrastructure, nurturing industry, improving skills, accelerating land reform and reducing crime.
Real GDP growth is now forecast to slow to 4.2 per cent in 2008, owing to power shortages and global economic volatility, before picking up again from 2009 as preparations for the 2010 Fifa World Cup gets under way.
Inflation is forecast to surpass eight per cent in the first part of 2008 before subsiding towards the end of the year as food and oil price pressures ease. South Africa may well end the year on a positive note.
