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Emerging Markets

The upside of down

Many believe South Africa’s export-dependent economy is in for a protracted slump. But that understates its basic resilience

In late August David Brown, the CEO of Impala Platinum, the world’s second-largest producer of the metal, reported that his company’s full-year profit had slumped 66% on falling prices. The head of the Johannesburg-based company also predicted no improvement in demand for catalytic converters – which account for about 60% of all platinum consumed – before the end of 2010.

“There’s been a lot of press about countries coming out of technical recession, but there’s not a strong link between [that and] consumers rushing out to buy new cars,” Brown says. “There’s a lag there.”

It is tempting to think that the export-dependent South African economy, which in the three months ending June faced its third quarter of contraction, is in for a protracted slump. Sub-Saharan Africa’s largest economy was slower to enter recession than its developed-country counterparts, and a glance at an industry such as platinum production suggests it may be slower to recover than others.

But that’s not necessarily the case. South Africa’s economy, which according to World Bank figures accounted for 0.5% of total world output in 2008 – about the same as Ireland and Finland – is more diversified than many people believe. It is not as dominated by mineral resources as it once was. And this gives it a resilience that might cap growth in boom times, but also limits the slide into recession.

“To the extent that the South African economy is not dominated by any particular sector, it has the ability to cope better,” says Iraj Abedian, chief executive of Pan African Capital Holdings, a Johannesburg-based investment company. “It’s well established that in good times South Africa cannot go close to the high-flying economies. In bad times, however, it performs relatively better, which means gross volatility is much less than other countries and certainly than peer emerging economies.”

Between 2001 and 2008, mining as a proportion of gross domestic product has dropped from 7.3% to 5.5% at constant prices, according to government data. This is less than half the contribution of manufacturing, which has, over the same time, fallen from 19% to 17.4%. In contrast to both, the wider financial services sector, which is now the largest single measured category, has seen its proportion of total economic output rise from 19.6% to 22%.

Since 1990, the South African economy’s worst annualized contraction was 2.1% in 1992. The biggest growth it has posted is 5.3% in 2006. It undershoots the 7% growth posted by India last year and China’s 9%, but South Africa’s expected decline – according to IMF projections – this year of 0.3% looks far better than Turkey’s predicted 5% drop and Thailand’s 3% decline.

South Africa has so far weathered the recession better than many economies in the developed world. The country’s four largest banks, which account for 80% of loans made, are conservative and did not expose themselves to sub-prime losses. Bad loans on retail lending seem to have peaked, and corporate bad debt is so far minimal. This stands the economy in good stead.

“We expect [South Africa] to pick up a bit quicker,” says Matthew Pirnie, ratings agency Standard & Poor’s analyst for South African banks. “The speed and shape – it depends on how the world reacts, how much exports pick up, what manufacturing does. The fact that public-sector spending has been high helps. We expect that to continue. We expect 2010 to almost be a full year of growth.”

Far from being a boom-and-bust resource-dominated economy, South Africa has the conservative nature of a balanced-portfolio economy.

“I see a distinct difference between a platinum recovery and the South African economy. I see the South African economy, for example, by next year first quarter, at the latest the second quarter, recovering back from negative to positive. But the same cannot be said about platinum,” Abedian says.

The IMF predicts annual growth of 1.9% for South Africa next year.

Nonetheless, the African continent’s largest economy faces the uncomfortable prospect of a rising rand. South Africa may no longer depend on mining in the way it once did, but it relies heavily on exports. The rand’s 20% increase this year against a trade-weighted basket of currencies impedes recovery. Unfortunately for South Africa, the increase has very little to do with the country itself.

“It’s more of a global story driving the rand stronger, but the very fact of its strength is damaging recovery prospects and could be its own undoing,” says Razia Khan, Standard Chartered’s regional research head for Africa.

The currency woes stem from a double-whammy of a weak US economy and the fact that commodities are still quoted in US dollars. Ordinarily, factors such as the country’s five percentage-point cut in interest rates since December, tighter fiscal constraints and greater political uncertainty – about the change of government that saw Thabo Mbeki’s administration replaced by Jacob Zuma’s, with closer ties to the ANC’s left-wing union and Communist Party allies – would have raised the risk outlook for the country and seen its currency weaken. But instead, the rand has strengthened.

In a country where tourism accounts for about 10% of the economy and is responsible for 1 million jobs, a strong rand makes South Africa a more expensive place to visit. Still, luck has played a part and may continue to do so. The British and Irish Lions rugby tour to South Africa in June pushed visitor numbers from the UK – already one of the country’s strongest tourist markets – up 56% on the same month a year earlier. Next year’s soccer World Cup will also bring in an expected 450,000-odd foreign visitors.

Things are looking up for the country. Longer term, South Africa stands to benefit from the untapped resources that lie in the region beyond its borders. While South Africa has its own limitations such as water, land and mineral wealth, it can put the skills it has developed in mining, agriculture and petrochemicals to use as a tool untapping these resources in the neighbourhood, Abedian says.

“Sub-Saharan Africa out-competes us when it comes to potential resources. In terms of prospects, provided the right political will is generated, South Africa has the potential of unpacking industries,” he says.

And this is what will keep driving growth to come – using the very skills, such as in mining, that South Africa has perfected but which play less of a role as the economy develops.

“If you see SA more like the powerhouse, not in terms of production, but in terms of technical and institutional capability, coupled with under-utilized and unrealized capabilities and natural resources in the rest of sub-Saharan Africa, you can get a configuration that can keep everybody growing for two to three generations.”



 

 

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