South Africa set to lag recoveries in emerging markets this year


The South African economy is likely to grow by less than three percent this year – while many of the country’s emerging markets peers are expected to make a meteoric recovery this year – some with growth of close to 10 percent, Business Report avers this morning.

Economists say there are a number of reasons South Africa is out of step with the dynamic developing countries of Asia and Latin America. These include high levels of household debt, a preference for welfare expenditure as opposed to infrastructure investment, ineffective local government and a labour relations framework that is closer to those of advanced economies.
“Not surprisingly, South Africa’s growth prospects are in line with the still troubled developed world,” says the morning broadsheet.

Citigroup Global Markets (Citi), the research arm of Citibank, forecasts the US will grow 2.7% this year and the euro zone 1.5%, while it puts growth in emerging markets at 5.7%. Jean Francois Mercier, the Citi economist based in Johannesburg, expects domestic growth of 2.8%.

One of the similarities between South Africa and advanced economies is that its consumers are at the wrong end of the credit cycle. In other words they are heavily in debt compared with consumers in most other emerging markets.

Comparative country figures on household debt are not readily available. But some insight comes from an analysis by UK asset management company Scottish Widows Investment Partnership on the outlook for Brazil, Russia, India and China (Bric). It pointed out that mortgage debt in the Bric countries was worth only 9% of gross domestic product (GDP), compared with 73% in the US.

In South Africa the ratio is just more than 40%. Total household debt shows a similar picture, according to Mercier. It is at 48.3 percent of GDP compared with ratios of 10% and 13% in India and China, respectively.

But South Africa is in much better shape than the US and UK where, according to Mercier, the ratios are 100% and 108%, respectively. But he said those economies could probably withstand higher consumer debt ratios. And he expected local “deleveraging” – paying back debt – would “limit the appetite of households for spending in coming years”.

Standard Bank economist Danelee van Dyk said household expenditure had been “the chief driver of post-recession recoveries”. She said this highlighted a key structural barrier to higher growth rates, namely that the economy’s drivers were not well diversified.

Iraj Abedian, the chief economist of Pan-African Investments, identified other structural issues. He said the labour relations framework, welfare policies and budgetary and fiscal governance made the local economy relatively inflexible.

He pointed also to “ineffective local governments and inefficient institutional capacity”, which constrained local government infrastructure developments.

But comparisons with other countries need to take into account the recession’s impact in different parts of the world.

Jeff Gable, the head of research at Absa Capital, pointed out that the local economy shrank only 2.5 percent from its peak in the third quarter of 2008 to its trough in the second quarter of last year, while many other economies contracted more sharply.

He said in the first quarter of last year, Russia’s economy shrank an annualised 27% and Mexico’s 23.4% while South Africa’s contracted only 7.4%.

Reuters meanwhile reports that President Jacob Zuma believes SA is recovering from the worst effects of the global economic crisis. But the president cautioned the revival will likely be slow and job-creation will lag.
“There are some indications that we may be recovering from the worst of the (global) crisis but this recovery may be slow and perhaps even temporary,” he said in a speech broadcast on SABC television on Saturday to mark the 98th birthday of the ruling African National Congress.

Zuma assured supporters that the ANC was still committed to its target of creating four-million jobs by 2014, providing quality healthcare and ending corruption and crime.

Zuma is under pressure to deliver on election promises made last year, including drastically reducing unemployment which stands at about 25% after last year’s recession slashed nearly one million jobs.

Due to the economic downturn, Zuma was unable to meet his pledge of creating 500 000 new jobs last year.