SOUTH AFRICA: The gathering storm
Rising inequality and unemployment have cast a shadow over South Africa’s economy while tensions between the government, trade unions and business threaten to undermine growth further
Even before this summers public and violent airing of its labour politics, South Africa was already seeing its economy rocked by significant headwinds. The prolonged downturn in the European Union has seen the countrys export revenues start to dry up, and while trade with other emerging economies particularly China has taken on increased prominence, that too is looking fragile as the Chinese economys growth slows.
Both the World Bank and the South African government have revised down their estimates of GDP growth to match the deterioration in the external environment. The South African Reserve Bank now forecasts that the economy will expand by around 2.7%, according to its governor, Gill Marcus. Almost 30% of our manufactured exports go into Europe, Marcus tells Emerging Markets. There has been significant diversification into the rest of the continent, but Europe is still hugely important for the region as a whole, for sub-Saharan Africa. The financial crisis that has been going on for five years is likely to take another five to seven years to be resolved as the hole is very deep, and it is taking its toll on all emerging markets, Marcus adds.
South Africas post-apartheid boom saw years of relatively high growth, peaking in 2006 at 5.5% before slumping to a recession in 2009. As the country tries to revive economic growth, the government is investing counter-cyclically to address economic bottlenecks, particularly through a major infrastructure plan, Marcus says. But with external conditions still weak, the private sector has yet to follow suit. Government infrastructure spending and gross fixed capital formation from government is very strong or reasonably strong... but were not seeing that from the private sector, and thats our concern, says Marcus.
In September, the banks quarterly bulletin showed that the countrys current account deficit had widened over the second quarter from 4.9% of GDP to 6.4%, its highest in four years. Some analysts have warned that the only thing currently shoring up the current account has been the inflow of portfolio investment ahead of South Africas inclusion in the influential Citigroup World Government Bond Index. By September, foreign investors had bought nearly $9 billion-worth of debt inflows which some observers worry could be reversed if market conditions change.
Inflation has been ticking down since its 2008 peak of 11.5%, but the likelihood of higher food and fuel prices impacting on that remains a worry for the central bank; still, like so much incident on the economy at the moment, the problem lies outside the governments control. Marcus says the biggest risk is external, with her country, like many in sub-Saharan Africa, depending on commodity prices for growth. We need to break the synchronized downturn of the major economies: the United States, Europe, Japan. No one can decouple. I dont think anybody can decouple from that. Thats the single biggest risk, in my view.
She does try to strike a positive note, however, pointing out that relative to many parts of the industrialized world, South Africas growth rate is attractive. If you look at Europe at the moment or other countries, 2.7% is quite reasonable, she says. Were far from happy with it, it doesnt meet our employment criteria. But in the global context, its not a slow [pace] of growth.
But the issue of employment is not incidental. There are few places in the world where labour is more politicized a fact which was put on full view in July, when 34 striking miners were shot by South African police at Lonmins Marikana mine. The events were a violent punctuation of a long-running and complex dispute that takes in rivalries within the militant union movements, the government itself and the private sector. The direct costs have been estimated at up to $500 million for the sector, which remains the largest contributor to the economy. How it will affect foreign direct investment into the country remains to be seen, but investors and businesspeople tell Emerging Markets that the spectre of political risk returned to haunt a country that had so painstakingly tried to build an appearance of hosting a first-world investment climate in a high-growth emerging market.
At the end of September, Moodys cut South Africas sovereign credit rating by one notch to Baa1 from A3, citing a decline in the governments institutional strength and the challenges posed by a negative investment climate among its reasons.
As walkouts and protests continue to rumble on across the country, the current leadership is facing an uncomfortable question: has the network of alliances that ultimately ended apartheid and propelled South Africa to democracy become toxic to the economy at large? Some in the private sector believe so. Prior to South Africa achieving democracy, business was seen as white, and labour was seen as black, Neren Rau, CEO of the South African Chamber of Commerce and Industry, which represents business interests in the country, tells Emerging Markets. There is the pain of the past that is still with us, and one cant ignore that entirely. We have overcome a bit of that, but its still there in the relationship.
The Congress of South African Trade Unions (Cosatu) remains a major player in South African politics, forming part of the Tripartite Alliance along with the ruling African National Congress and the South African Communist Party. While often highly critical of ANC policies, the alliance is central to South African politics, and means that just as labour has a role in politics, politicians must take a strong stance on labour issues.
The key issue of the complexity is that its not just a relationship between business and labour, its always business, government and labour, and in very few instances can you extract yourself from the triumvirate, Rau says, echoing the sentiments of other South African businesspeople contacted for this article. In negotiations, business is usually the weaker in the triumvirate, because theres an alliance between government and labour, so business is on its own, pretty much.
The governments ambivalent attitude does, to a certain extent, harm the countrys chances to attract more foreign direct investment, according to some analysts. Peter Attard Montalto, emerging markets economist at Nomura, says that this attitude continues to harm South Africa to a certain extent as the relationship between labour and business is something that foreign direct investors look at. The worry is that the government has mixed allegiances. They want to do the right thing but they have to satisfy the traditional entrenched unions.
The suggestion in the immediate aftermath of the shootings that wages in the mining sector be centrally negotiated with government supervision was a demonstration, according to Attard Montalto, of how the government has struggled to make appropriate policy
in the current climate. That approach would have moved the balance of power in negotiations towards the larger unions, such as the National Union of Mineworkers, and risked increasing the sense of disenfranchisement and alienation among individual workers and the smaller, more militant unions, such as the Association of Construction and Mineworkers Union, whose turf war over membership was a contributor to the Marikana violence.
Some of the policy actions have been moves in the wrong direction, both in terms of reducing competitiveness and increasing the costs for the mining industry, but also in terms of addressing the social issues as well, he says.
Domestically, the concern is that mistakes made now could lock in the unemployment and inequality for years to come, condemning another generation to the same imbalances as their parents. It is another awkward truth for the ANC that, while an immeasurable improvement on the apartheid years, South Africas growth story has been far from equitable. In July, the World Bank released its first Human Opportunity Index for the country, analyzing the opportunities of South African children based on their circumstances at birth. Their results were not encouraging. Those born into informal settlements, townships and rural areas were shown to be effectively locked out of the wider employment opportunities in the country.
On a global scale, South Africa is an outlier in terms of the level and inequality of employment opportunities, suggesting a systemic problem in the labour market, which, after being violently expressed at Marikana, has been laid bare.
As Sandeep Mahajan, one of the authors of the study and the World Banks lead economist for South Africa, tells Emerging Markets, the post-apartheid government has had some successes in improving the opportunities for the population, particularly given the very poor legacy that they were left with. However, certain parts of the population, particularly those in the townships, struggle to escape the cycle of poor opportunity and poverty that they are born into. You have very unequal circumstances at birth, and children find it hard to overcome those circumstances, says Mahajan. Once they do, they find their opportunities constrained again in the labour market.
This cycle has to be broken if individuals are going to become productive. Mahajan says that while there are no silver bullets, policy experimentation coupled with monitoring and evaluation is needed if the government is going to find some way out. The main policy objective from that point of view is inequality, he adds. But first of all it is to increase the number of jobs.