Report produced by Coface, the international credit insurer

Strengths

•South Africa is the economic powerhouse of Africa, leading the continent in indus-trial output and mineral production, generating a large portion of the continent’s electricity. 

•The economy of South Africa is the largest in Africa, accounting for 24% of the continent’s GDP in terms of PPP, and is ranked as an upper-middle income econ-omy by the world bank. 

•The country has abundant natural resources, well developed financial, legal and transport sectors, a stock exchange ranked amongst the top 20 in the world, as well as a modern infrastructure supporting efficient distribution of goods throughout the Southern African region. 

Weaknesses

•South Africa suffers from a relatively heavy regulation burden when compared to most developed countries. 

•Increasing costs for corporates with rising wages. 

•Poverty, inequalities, social risk mixed with high unemployment and a shortage of qualified labour. 

Economic growth

The nominal GDP at market prices during the second quarter of 2013 was R836-billion, which was R23-billion more than in the first quarter of 2013. Real gross do-mestic product at market prices increased by three percent quarter-on-quarter, sea-sonally adjusted and annualised.

The largest contributions to the quarter-on-quarter growth were the manufacturing industry at 1,7 percentage points based on growth of 11,5 percent; finance, real estate and business services contributed 0,8 of a percentage point based on growth of 3,5 percent, and the wholesale, retail and motor trade, catering and accommodation industry contributed 0,4 of a percentage point based on growth of 3,2 percent. 

The year ahead will probably be similar to 2012. Although there is optimism that global prospects have improved, many economies remain in unchartered territory and obstacles in the form of high debt levels and weak confidence could lead to setbacks. This is particularly true of Europe, still a key trading partner for SA, where fiscal aus-terity will impede activity. In the US, much will depend on the ability of politicians to navigate a path to fiscal sustainability. 

In China there is intention to move away from investment towards a stronger con-sumer orientation. This could have implications on commodity prices. Global eco-nomic conditions were again difficult, while locally infrastructure constraints, policy uncertainty, and labour and social unrest all contributed to limited private sector in-vestment and job creation. Therefore broad-based growth was slow. Even with the right choices, economic growth is likely to be below 3%. The main impetus will be investment in public sector infrastructure. Exports will remain under pressure.

Economy by sector

Of the ten industries surveyed by Statistics South Africa to determine the growth fig-ure, seven recorded an improvement in growth compared with the first quarter. The sector contributing most to second quarter growth was manufacturing, which ac-counted for 1,7 percentage points. 

The value added by the manufacturing sector accelerated to 11,5% q-o-q saar from a decline of 7,9% in the first quarter. 

Growth recorded in the manufacturing sector was the result of higher production in the ‘basic iron and steel, non-ferrous metal products, metal products and machinery’ divi-sion – following scale operational difficulties in a key steel producer in the first quarter – the ‘motor vehicles, parts and accessories and other transport equipment’ division, the ‘glass and non-metallic products’ sector as well as the ‘textiles, clothing and leather products’ sector.

The value added by the finance and real estate industry, which made up 21,5% of GDP in 2012, accounted for 0,8 percentage points of the quarterly growth, mainly due to increased activity in the banking sector and financial services. The wholesale, retail, motor trade and catering and accommodation industries contributed 0,4 percentage points to the quarterly growth number. 

The improvement in second quarter growth was expected, coming off a low base in the first quarter, but is unlikely to continue into the third quarter. Coface’s forecast for the 2013 full year growth is 2,0%, down from the 2,5% recorded in 2012. 

The GDP figures, together with the July inflation number at 6,3%, at face value weak-ens the case of those calling for another rate cut. However, annual growth is still low at 2,0%, placing the Reserve Bank in the unenviable position of deciding on rates in an environment of still weak growth and rising inflation stemming mainly from a weak currency. The Reserve Bank is likely to opt for an accommodative policy for as long as possible. Interest rates are likely to be on hold well into 2014. 

The contraction in value added by the agricultural sector slowed to 3,7% from 4,9% in the first quarter. The strike-plagued mining sector also recorded a decline in value added in the second quarter of 5,6%, after the 14,6% growth recorded in the first quarter.

Growth in the mining sector, which accounted for 9,3% of GDP in 2012, shrunk 4% in 2012 and the 2013 figure will probably not improve much as the issues that affected the sector last year are still at play. 

In the tertiary sector, growth in the wholesale, retail and motor trade and catering and accommodation sector accelerated to 3,2% from 1,9%. Value added by the transport, storage and communication sector grew by a slower 1,6% from 2,2%, while growth in value added by the finance, real estate and business services sector improved to 3,5% from 3,3%. 

Growth in general government services slowed to 0,3% from 1,9% while value added by the personal services sector grew by 1,9% from 1,4% although the moderation in consumer spending will help to contain demand driven inflation, risks to the inflation outlook remain on the upside due to the weaker rand. Household expenditure, which is a key component of the economy, remained subdued in first quarter of the year. 

Infrastructure

A total of 88 new capital expenditure projects were announced in 2012. This is the largest number of projects since 2008, up from 65 projects in 2011. The private sector remained the main driver of investment plans, but its contribution to both the total value and the number of projects has fallen. 

Projects by the private sector accounted for 60% of the total value of projects an-nounced. The sector announced 59 new projects worth R53,2-billion in 2012. In con-trast, the contribution by general government in both value and number of projects has improved considerably over the past three years.

General government announced 24 new projects worth R22,8-billion in 2012, com-pared with R17,4-billion in 2011. Public corporations announced only two new projects worth R12-billion, which is the biggest value in the last three years. 

The outlook for 2013 remains relatively cloudy. Consumer spending, which has been the driver of the recovery, is likely to lose some momentum. However, fixed invest-ment by the public sector could increase further as government accelerates the roll out of its infrastructure spending programme. 

Government will have spent R1-trillion on infrastructure in the five years to the com-pletion of the current administration’s term of office in 2014. That is more than twice the amount of money spent in the previous five years and substantially more than was spent in the last five years of apartheid.

Foreign trade

The trade deficit widened to R14,2-billion in July against the market consensus of R8,9-billion and from R7,7-billion in June. Exports increased by 10,9% m-o-m, while imports surged by 18,9%.

The cumulative deficit for the first seven months to July 2013 amounted to R89,4-billion compared with R59-billion over the same period in 2012. Exports were boosted mainly by precious or semi-precious stones, which rose by 21,7% m-o-m, base metals (up 15,6%), electrical equipment (up 17,8%), while shipments of vehicles and equip-ment increased by 8,4%. On a y-o-y basis, precious or semi-precious stones exports increased by 24,7%, base metals by 37,8%, electrical equipment by 21,7%, while vehicles and equipment gained 23,8%. 

On a monthly basis, total imports were boosted mainly by electrical equipment, which rose by 19,0% m-o-m as well as vehicles and equipment (up 32,4%). On a y-o-y basis, imports of electrical equipment rose by 31,5%, while those of vehicles and equipment increased by 30,8%. 

Financial systems

South Africa’s financial system is stable thanks to an efficient regulatory infrastructure, well-developed financial markets and sound financial institutions. The country ranked 3rd out of 144 countries in financial market development and first in both legal rights in the financial sector and in securities exchanges regulation, according to the Global Competitiveness Report 2012-2013.  Domestic banks are already capitalised above Basel III levels, a new global regulatory standard. South African banks are currently operating with an average capital adequacy ratio of 15% (12% for Tier 1 capital), well above the minimum prudential capital adequacy requirement of 10%. 

In June 2012, the SARB proposed a minimum Tier 1 capital adequacy ratio of 6,5% and a total capital adequacy of 10% by January 2015. The financial sector performed well in 2012. 

Annual growth in broad money supply (M3) also slowed to 7,4% in July from 9,2% in the previous month. The market had expected it to ease to 8,7%. During the month, M3 grew by 1,2% or R29,6-billion, mainly driven by sharp rebounds in net foreign as-sets and net claims on the government sector, which rose by R11,1-billion and R39,1-billion respectively following sharp falls in June. In contrast, claims on the private sec-tor and net other assets and liabilities declined in July, following strong rises in June. 

Debt

Domestic debt of national government increased substantially from R884-billion during fiscal year 2010-11 to R1,06-trillion during fiscal year 2011-12. Domestic debt ac-counts for 90% of total gross loan debt. Due to the liquid and efficient nature of the domestic money and capital markets, the primary source of funding for the budget deficit remains domestic borrowing through a combination of Treasury bills, fixed-income and inflation-linked bonds.

The country’s outstanding foreign debt increased from $50,9-billion at the end of 2011 to $53,3-billion at the end of fiscal year 2011-12. The increase in foreign debt was mainly due to increased borrowing from international capital markets by the national government, the domestic banking sector and foreign borrowing by parastatals to fund infrastructure investments. 

Business Climate

In the most recent Doing Business report, South Africa is ranked 39 out of 185 coun-tries in terms of ease of doing business. This ranking is up four positions from last year. In some areas, the country’s ranking has remained unchanged, South Africa is still ranked as number one for ease of getting credit. 

Labour force

The unemployment rate rose to 25,6% in the second quarter from 25,2% in the first as the labour force expanded by more than the number of employed people. The labour force rose by 220 000 or 1,2% over the quarter, while the number of employed people rose by 0,7% or 100 000. Both the formal and informal sectors created jobs, with the number of people employed in the two sectors rising by 109 000 and 30 000 respec-tively. In contrast, both the agricultural and private household sectors shed jobs over the quarter. The number of discouraged work seekers increased by 35 000 after rising by 73 000 in the first quarter.

The unemployment rate is likely to remain high in the short term as firms remain cau-tious of expanding capacity and employing more people in the current challenging economic and labour environment. Employment is likely to be driven mainly by the public sector as it rolls out its infrastructure programme.

The increase in the unemployment rate adds to the evidence that the local economy is struggling to pick up momentum. Although recent indicators have shown that demand-driven inflation remains contained, risks to the inflation outlook are still on the upside. This, along with the poor economic growth outlook is likely to persuade the Reserve Bank to maintain its accommodative monetary policy stance well into 2014. 

Media information:

Michele FERREIRA
SENIOR MANAGER: MARKETING AND COMMUNICATION
TEL. : +27 (11) 208 2551  F.: +27 (11) 208 2651   M.: +27 (83) 326 2268
This email address is being protected from spambots. You need JavaScript enabled to view it.