South Africa’s lacklustre economy could soon fall even further down the pecking order of African markets thanks to a sharp slowdown in its economic outlook, a leading emerging market investor has warned.
Nigeria overtook South Africa as Africa’s biggest economy last year, after the oil-rich country rebased its GDP figures. Now Egypt could overtake South Africa and become the continent’s second biggest economy, according to Renaissance Capital.
Charles Robertson, RenCap’s global chief economist, noted that on a dollar basis South Africa’s economy was now only $2bn bigger than Egypt’s. “How the mighty have fallen. South Africa [has been called] a colossus in Africa, but now it is on the verge of falling to third place,” he said.
The IMF downgraded its global growth projection for 2015 to 3.1% from 3.3% this week, but South Africa suffered an even greater revision of 0.5 percentage points. Its GDP is expected to rise by just 1.5% in 2015.
Finance minister Nhlanhla Nene has admitted South Africa must look beyond economic growth in its quest to tackle poverty and income inequality.
Nene said demand in South Africa’s main trading partners, including China, was dragging down growth in his country. This adds to homegrown problems most notably electricity supply. “We have to accept that the situation we are in is not going to abate in a short while,” Nene said, discussing the local and global growth environment.
In the absence of higher growth rates, Nene said South Africa would have to focus more on developing sectors that could bring more young and unskilled workers into the labour force, including via special economic zones to develop manufacturing.
“It’s the quality of growth that matters more than the quantity,” he said. “In a number of years we’ve had 5% growth, but unless that growth is inclusive enough to bring on board those that are excluded from the labour market, it doesn’t address the most critical challenges of income inequality and poverty.”
POWER SHORTAGES
South Africa joins other large emerging markets such as Brazil and Russia in its declining growth rate. But it is the country-specific matter of power shortages that is the biggest brake on South African growth — more than rising US rates or slowing Chinese growth — said Steve Kayizzi-Mugerwa, acting chief economist of the African Development Bank.
“South Africa to some extent is dependent on exports of gold, but its economy is diversified. The lack of power, which has led to layoffs, is more important,” said Kayizzi-Mugerwa.
Nene agreed the power shortages were “the biggest drag” on the economy, though lower global commodity demand has hurt the mining sector and a drought has also brought down agricultural production.
After a $1.9bn cash injection to the state electricity company Eskom, and converting a $5bn government loan to Eskom to equity, Nene said South Africa was attracting more investment in the electricity sector.
“We’ve seen an improvement at Eskom. It had poor leadership and a weak balance sheet. We have a new CEO, a new CFO and a new board.” He said the new BRICS bank could also help fund the electricity roll-out.
Building trading relations with the rest of Africa is another priority. “When you add value to primary commodities, that helps, but you also need to look for new markets, and new partnerships,” said Nene.
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