Since 1994, the South African currency’s value has correlated with the emerging market index, the result of its status the currency of reference across emerging markets.
“It seems now like the market is starting to think that South Africa’s internal challenges are compromising the rand’s role as the ‘dollar of emerging markets’,” says Peter Armitage, CEO of Anchor Capital. Armitage was updating members of the Institute of Directors in Southern Africa (IoDSA) on the country’s economic outlook. “South Africa is suffering a crisis of confidence.”
Adding weight to that analysis is the cover story of the 20 October edition of The Economist: “Cry, the beloved country: South Africa’s sad decline”.
Armitage’s analysis of South Africa’s position in the global economy is troubling but not wholly negative. The country in fact does have many strengths-some of them unexpected-but it needs to use them to solve internal challenges that are in danger of becoming systemic.
Many of South Africa’s indicators look good. The country is ranked 29 on the International Monetary Fund’s 2011 gross domestic product index and, in terms of gross domestic product per person, is ahead of fellow BRICS countries China and India. Things also look rosy in the private sector, where the Johannesburg Stock Exchange (JSE) has delivered an average return of 15% per year since 1995.
“But that’s because 35% of JSE earnings comes from foreign investments, and 40% from resources,” says Armitage. “The resources boom is essentially driven by Chinese demand and is not the result of anything we are doing right-in fact, our export volumes have been declining. It’s only the fact that resources prices have risen so much that we are in positive territory.”
In short, then, South Africa’s strength is actually based on external factors with its weaknesses, sadly, internal. We are running a near-record trade and current account deficits, and are reliant on increasing amounts of foreign capital inflows. We are facing demands for huge wage increases by a work force that is relatively unskilled which are not accompanied by increased productivity. And most poisonous of all, while there is a relatively large amount of money in the country, it is not distributed evenly-hence our high GINI coefficient-and unemployment remains frighteningly high.
These problems have to be solved.
On the plus side, says Armitage, government spending and rising wages are driving consumer spending, and our financial sector is healthy. South African companies are waking up to the potential offered by the rest of Africa.
“Government spending is, however, going to drive growth internally, but we need to make sure that money gets where it should-there’s too much leakage at present,” he says.
A final important point is that the weakening rand actually acts as a buffer that protects the economy from some of the impact of higher wages, by increasing the rand value of what is exported.