by Piet Coetzer

Diversification and human capital crucial

South African economy may miss targets

Africa’s economic outlook for 2013
African Development Bank.jpg

According to the African Economic Outlook 2013 (AEO) released last week in Morocco, South Africa continues to face the triple challenge of chronic high unemployment, poverty and inequality amid a slow and volatile domestic and global economic environment. In the meantime, Standard & Poor’s and Fitch Ratingswarned that the country may miss its economic growth target this year.

The AEO report – produced annually by the African Development Bank (AfDB), the Organisation for Economic Co-operation and Development (OECD) Development Centre, the United Nations Economic Commission for Africa and the UN Development Programme – expresses the opinion that on the whole Africa’s agricultural, mining and energy resources could boost the continent’s economic growth and pave the way for a breakthrough in human development.

On South Africa it notes, however, that “despite a rich natural resource endowment, the country’s extractive industry continues to operate below potential due to the lack of technological progress and policy uncertainty. The African National Congress conference is considered to have at least partially alleviated the latter by ruling out outright nationalisation.”

Fresh on the heels of the outlook report, Bloomberg reported that the latest data showed the South African economy expanded an annualised 0.9% in the first quarter – the slowest pace since a 2009 recession.

While there is “no imminent threat” to South Africa’s credit rating, Fitch may lower its growth forecasts this year, said Carmen Altenkirch, a sovereign analyst. Standard & Poor’s credit analyst Christian Esters said the data increases “downside risks” to its estimates.

 

Outlook for Africa

The AEO report assesses that the continent’s economic outlook for 2013 and 2014 is promising, confirming its healthy resilience to internal and external shocks and its role as a growth pole in an ailing global economy. Africa’s economy is projected to grow by 4.8% in 2013 and accelerate further to 5.3% in 2014.

The report, however, shows this growth has been accompanied by insufficient poverty reduction, persisting unemployment, increased income inequalities and, in some countries, deteriorating levels of health and education.

Now is the time to step up the tempo of economic transformation, so that African economies become more competitive and create more gainful jobs,” it states, adding that “widening the sources of economic activity is fundamental to meeting this challenge.”

The report argues that African countries must tap into their natural resource wealth to accelerate the pace of growth and ensure the process can benefit ordinary Africans.

African countries must provide the right conditions for turning natural resources into jobs, optimise their resource revenues through smart taxation, and help investors and locals to make the most of linkages,” said Mario Pezzini, director at the OECD Development Centre.

According to the report, four key elements are needed to achieve that objective:

  • African countries should create the right conditions for such a transformation to take place, including infrastructure, education and the creation of larger and more competitive markets;

  • The primary sectors require sound land management, balanced and effective tax systems, and the right mechanisms and incentives to cause an acceleration and diversification of the sources of growth. In the agricultural sector, for instance, transport, fertilisers and more resistant seeds are required for an increase in productivity. Africa has 24% of the world’s agricultural land, but accounts for only 9% of its production; and

  • Governments and investors must ensure a fair share of the proceeds from natural resources and extractive industries accrue to society, for example they should be invested in people’s capacities to take up new jobs in promising sectors.

 

The report suggests that African countries can foster change and economic diversification actively, for example through corridors of development around power, transport and communication lines. Stable and transparent use of budgets is key to achieving that goal.

Now is the time,” said Mthuli Ncube, chief economist and vice president of the AfDB. “After 10 years of improved stability, sound macro-economic policies and blossoming trade links, growth has made African nations freer than ever to choose their own development paths and implement active policies for economic transformation.”

Higher levels of human development for all, including the most vulnerable, can accelerate the pace of economic transformation – leading to a virtuous cycle of growth and development.

 

South Africa

In its country-specific notes, the report records the fact that the country’s economic growthsufferedin 2012 from social unrest and the euro crisis, but is expected to accelerate moderately in 2013 and 2014, thanks to improved global demand and accommodating macro-economic policies.

South Africa continues to face the triple challenge of chronic high unemployment, poverty and inequality amid a slow and volatile domestic and global economic environment.

The National Development Plan needs to be implemented to address structural bottlenecks to job creation, according to the report.

It notes that 2012 was one of the most turbulent years since 1994 as labour unrest in the mining sector crippled production. In addition, the country’s major trading partner, the euro area, slid into recession. Nevertheless, fixed investment accelerated in 2012. Economic growth picked up in 2012, but fell short of forecasts as export volumes barely expanded and consumer demand slowed.

Economic growth is expected to benefit from expanded infrastructure investment and an increase in electrical capacity. That said, strong recovery will depend on the resolution of global challenges and on alleviating structural constraints.

Inflation stayed within the South African Reserve Bank’s 3-6% target range, although it briefly surpassed the upper limit.

The rand has weakened and is expected to remain under pressure. National government debt increased to nearly 39% of the gross domestic product in 2011-12. Bond yields trended down in 2012, but fiscal room continued to be constrained by the international economic slowdown, the impact of social unrest and large increases in the public sector wage bill which could affect the government’s plan to increase infrastructure investment.

The report further notes that crime rates are falling, the goal of universal access to primary education has been achieved, health indicators are improving and gender disparities are being addressed.

However, in 2011, less than one in six households had adequate access to food; less than one in six individuals belonged to a medical aid scheme; unemployment stood close to 25%, and one in three adult South Africans still had no access to a formal financial institution.”

It lists a number of reasons for the underperformance of the country’s minerals sector: policy uncertainty, electricity shortages, infrastructure bottlenecks, water scarcity and skills shortages.

If these impediments were addressed, the mining sector could grow by 3-4% annually until 2020, creating at least 300 000 jobs,” the report states. 

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