By Saijil Singh, lead analyst at Coface
South Africa is in a position where growing export profits are a requirement for the maintainable growth. The increased domestic expenditure between 2004 and 2007 was possible due to a commodity growth.
This was reinforced by the fact that, as a result of the growth, employment and redistribution strategy, fiscal deficits were well contained and government did not crowd the private sector out of debt markets. South Africa’s limited pool of savings could be fully dedicated to supporting economic growth.
These conditions, which were favourable for growth, have now been reversed. Following the crisis of 2008, government revenues contracted. The current government administration does not have the same resolve that the Mbeki administration had to keep spending under control. The number of government employees and their salaries have increased significantly.
South Africa has become locked in a cycle in which fiscal deficits have averaged about 5% of GDP. Government again absorbs a significant proportion of domestic savings. The growing remuneration of public sector employees initially boosted consumption and promoted growth, but these temporary benefits have proved unsustainable. Since 2012, declining export revenues have taken their toll. A rising current account deficit has weakened the rand, eroding real personal incomes and mining investment has contracted.
These economic distresses are most clearly manifest in SA’s large current account deficit, currently 6% of GDP. Given an infrastructure backlog, inadequate education systems and poisonous labour relations, South Africa faces huge problems that will take years to fix. An economy continually adjusts to new realities. Given the inflexibility of the economy, the rand exchange rate has to bear the brunt of this adjustment process.
What is most concerning is that we cannot count on a recovery in commodity prices any time soon. Commodity price booms, such as the one we have recently enjoyed, are infrequent events. New ideas and actions soundly based on economic realities are needed to generate the higher growth rate SA desperately needs.
Industry and government improving the current conditions
The relationship between government and business in South Africa has become dysfunctional. A rejuvenated private sector is the key to reversing the current conditions and achieving the required growth rates. Currently the private sector faces serious challenges. A surplus of new regulations and government programmes, almost all of which increase the cost of doing business, makes it difficult to justify new investment.
This was also noted in the World Bank’s Ease of Doing Business 2015 data where South Africa dropped six places from the previous year. South African companies are investing, but increasingly their focus is on expanding internationally, especially in Africa, north of the Limpopo.
Private sector investment within South Africa is focused on increasing productivity to compensate for above-inflation wage increases.
The cost of excessive wage demands results in reduced employment. South Africa is caught in a cycle of lacklustre growth, which does not create jobs.
The simplest way to fix the South African economy is to promote an environment which allows the private sector to prosper by reducing regulations and removing policies that inhibit investment. Job creation and rising tax revenues, that will allow government to achieve its ambitious social agendas, will follow.
Industries being hit
The biggest operating costs for the mining and construction sector were labour at 40 percent, mining supplies and consumables at 21 percent, and water and electricity utilities at 10 percent. Mining companies seem to be cutting back on exploration in an attempt to reduce costs.
However, this could have long-term consequences for sustainability. The mining companies surveyed said the greatest risks their businesses faced were from labour unrest, volatile prices and exchange rates. Infrastructure access and capacity were also problems, including constraints on power as well as the regulatory uncertainty. At the end of this year, mining companies will have had their compliance with the Mining Charter evaluated.
Businesses are uncertain what sanctions would be applied where their Mining Charter obligations had not been met. As such, mining companies needed to integrate these risks and performance management.
Increasing costs and regulatory issues arising from the new mining charter and mining tax regime, which are currently under review, for instance, means that South African mining companies will need to dig deep to find ways to be profitable.
Looking into 2015, South African businesses are confident about their own growth prospects. The majority of South African businesses expect their turnover to grow by around 5% in 2015. It is vital that Government and other stakeholders work together to arrest the decline in confidence before it worsen.
Since companies indicated that Government bureaucracy and its handling of the current economic situation are their biggest challenges, there is more the government could do to build business confidence in the short to medium term. Confidence in the national economy dropped, but confidence in the global economy is improving, perhaps one reason that South African businesses are eager to grow export business.
Business attitudes to risk also appear to be changing. Half of business decision makers describe themselves as risk-takers. Businesses have become more risk averse over the last few years.
It is natural for companies to be cautious given the economic challenges South Africa faces. It is encouraging that many still have the appetite for calculated risk for the sake of growing their businesses.
A substantial portion of businesses are already doing business in foreign countries, stating that exports account for an average of one-fifth of their turnover. The last year has been favourable for exporters due to the devaluation in the rand. Six in ten South African exporters anticipate export turnover growth in the next year.
The instability of our exchange rate, Government bureaucracy and a lack of skills are the challenges constraining further growth of our export revenues.
Businesses do not feel they are supported in their ambitions to grow their exports. Very few businesses feel they receive the support they need from government, and what government should do to help them grow exports is to offer more financial incentives.