South Africa: Risk Assessment
Business Climate Rating1
Growth slowdown confirmed in 2014
The growth rate of the South African economy slowed in the first quarter 2014 (-0.6% against Q4 2013). Economic activity in the mining sector is expected to pick up in the second half, having been severely impacted by a strike that lasted several months at the beginning of the year, whilst the construction and agricultural sectors should remain strong. Manufacturing activity however, will remain weak (its PMI index score for May 2014 was its lowest for almost 5 years). The low levels of wage rises and high household debt will continue to keep private demand in check despite the fact that this is the main driving force for growth in the South African economy (66% of GDP). There is a danger that private sector investments could again be postponed, but ongoing public sector investments, in particular in the electricity and transport sectors, should help prevent an overly sharp fall in domestic demand. The improvement, even if only slight, in external demand should also help to limit the extent of the slowdown in growth in 2014.
Inflationary pressures increased at the beginning of the year and the rate reached its highest level since July 2009 (6.6%) in May as a result of the rise in food and regulated products with higher energy costs and depreciation the of rand. Price inflation is likely to continue into the second-half and the ceiling set by the central bank (6%) could be exceeded for the year as a whole. A further rise in interest rates, following on from that applied by the SARB in January 2014 (+50 bp to 5.5%), will help reduce inflationary dangers but would act as a drag on growth.
Twin deficits unlikely to be significantly reduced in 2014
South African budget revenues for the tax year 2013-2014 were higher than forecast thanks in particular to the knock-on of the depreciation of the rand on tax revenues. Even though wage rise are expected to remain at a moderate level, the investment expenditure commitments could make it difficult to bring expenditure under control in the tax year 2014-2015. The slowdown in growth will continue to weigh on revenues where growth will be limited and the rise in the public debt will increase the burden of repayment charges for the government. The government balance will therefore remain in deficit during 2014.
The improvement in the current account seen in the first quarter, linked in part with increases in foreign dividends will not last. Exports are suffering under the combined impact of the fall in the prices and volumes of exported mining products and the weakness of the competitive position of the manufacturing sector despite the fall in the rand. On top of this, the cost of imported energy remains high. The moderate level of domestic demand and a slight improvement in external demand should however help prevent any further worsening in the balance.
In January 2014, the South African currency, along with those of many other emerging economies, was subject to strong downwards pressure in the context of the slowing of the expansion of the Chinese economy and the prospective of less accommodating US monetary policy. Although the exchange rate firmed up following the re-election of the ANC in May 2014, the continuing high level of the current account deficit, the downbeat growth forecasts and continuing concerns over the social climate in the country are likely to result in a high level of volatility for the ZAR.
South African banks have a satisfactory level of capitalisation and the ratio of non-performing loans has improved. The concentration of loans to often heavily indebted households, and to the financial sector could to some extent weaken the banking system which is otherwise fairly solid.
The ANC’s victory in the May 2014 elections does not rule out potential social and political tensions
Despite the comfortable victory in the May 2014 elections, there are ongoing concerns around the political and social outlook for the country. J. Zuma will, in his new term of office, have to compromise with other members of the governing alliance (in particular the unions), the opposition parties who increased their shares of the votes in the May 2014 legislative elections, as well as with the divergent factions within the ANC itself. The enduring failure to meet the expectations of the population in terms of the fight against unemployment, poverty and corruption could give rise to social instability.
South Africa has a modern legal system but government inefficiency, the lack of qualified work force; the high crime rate and corruption handicap the business environment.
- Political and economic power which makes the country a key player on the continent.
- Wealth of natural resources (gold, platinum, coal, chromium…)
- Developed services sector (financial particularly)
- Protective legal environment for investors
- Poverty, inequality, sources of social risk (crime, demonstrations)
- High unemployment and shortage of skilled labour
- Infrastructure shortcomings (transport, energy)
- Dependence on volatile foreign capital flows