Coface report highlights strain on SA's growth

Growth lags behind developing world

South Africa's economic growth is lagging somewhat behind that of its peers in the developing world. IMF forecasts for 2013 indicate that emerging and developing economies will grow by 5.5% while South Africa's GDP is expected to grow between 2.5% and 3%.

One of the key reasons for slower growth is South Africa's foreign trade structure and reliance on Europe. President Zuma used the opportunity at the World Economic Forum in Davos earlier this year to assure foreign investors that South Africa is on the right track.

2012 will be remembered for the negative impact of labour unrest and resultant production stoppages in the mining sector. Mining reduced GDP by 0.5% in the first three quarters of the year. This excludes the biggest slump in the sector during the fourth quarter 2012.

Other significant features of the growth slowdown in 2012 were the slowdown in household consumption spending, poor growth in private fixed investment spending and a slump in real export growth.

South African's inflation rate slowed to a five-month low in January 2013 after the statistics office adjusted the consumer price basket while food and fuel prices eased. In December, the inflation rate fell to 5.4% from 5.7% Statistics South Africa stated.

Government cut the price of fuel by 1.2% in January 2013, as a stronger rand in the previous month helped to curb import costs. Since then, the currency has plunged 4.8% against the dollar and fuel prices are on the rise, with prices increasing in March by a further 8%, adding to pressure on inflation.

South Africa's strengths

• South Africa is the economic powerhouse of Africa, leading the continent in industrial 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 economy 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.

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South Africa's 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 sources of social risk mixed with high unemployment and shortage of qualified labour.

Mining

Output in the mining sector remained weak in December with total mining production down by 7.5% y-o-y after falling by a revised 3.8% (previously -4.5%) in November. On a monthly basis production rose by a seasonally adjusted 1.2% compared with 12.0% in November. Non-gold output was down by 5.0% y-o-y, while gold production slumped by 21.2% in December. For the fourth quarter, total mining production fell by a seasonally adjusted and annualised 4.6% q-o-q as output of most minerals dropped.

For 2012 as a whole, mining volumes fell by 3.1% after contracting by 0.9% in 2011. Mineral sales were down by 15.6% y-o-y in November after falling 13.7% in October. On a monthly basis sales rose by a seasonally adjusted 2.3% in November, but sales were down by a seasonally adjusted 10.2% in the three months to November after declining by 6.8% in the same period to October. These figures indicate that the mining sector is still reeling from the devastating effects of widespread labour strikes in the third and early fourth quarters.

Prospects for the mining sector remain dim as the industry faces headwinds both on the global and domestic fronts. Globally, commodity prices are not likely to make significant gains as demand conditions remain relatively unfavourable. Locally, tough operating conditions persist. Rapidly rising production costs, mainly energy and labour costs are likely to compel mining companies to scale back operations or even halt them in some cases.

This will have a negative impact on production, with any improvements coming mainly from a normalisation of output should strike activity ease. These numbers, together with other recent releases, suggest that GDP growth for the fourth quarter was around 2.0%, with overall growth of 2.5% for the year as a whole. Overall, economic activity in the sector therefore remains generally sluggish while upside risks to inflation have increased due to the weaker rand.

Retail

Annual growth in retail sales slowed to 2.3% in December from 3.6% in the previous month. Over the month, sales rose by a seasonally adjusted 1.0%, causing sales for the last quarter of 2012 to decline by 0.2% following 2.1% growth in the third quarter.

As a whole, 2012 retail sales rose by 4.3%, slightly down from 5.9% in 2011. Consumer spending is likely to moderate during 2013 as weak consumer confidence, heightened worries about job security and high debt, make consumers more cautious about spending on non-essential items. The overall economic outlook remains weak and fragile, while inflation may increase due to the weaker rand.

Manufacturing

Annual growth in manufacturing production slowed to 2.0% in December 2012 from 3.7% in the previous month, versus the consensus forecast of 2.9%. The increase in output was recorded in seven of the ten major categories. Significant contributions came from petroleum, chemical products, rubber and plastic products. Over the month, total production fell by 2.2% on a seasonally adjusted basis following a 2.6% rise in November.

On a quarterly basis, however, production improved by 1.6% in the final quarter of 2012 following two quarters of weaker growth. Both local and international economic conditions are expected to improve only moderately during 2013. A weak Eurozone will continue to hurt the large export-orientated industries.

The recent recovery in infrastructure spending by the public sector will probably support the industries producing capital goods and other inputs for local projects. But the growth rate will be contained by slower capital expenditure by the private sector in response to the bleaker economic environment both locally and internationally.

Therefore, while a moderate recovery in manufacturing production will continue in 2013, no impressive upward momentum is expected. Overall, economic activity remains generally sluggish while upside risks to inflation have increased due to a weaker rand.

Infrastructure

A new economic plan, the National Development Plan (NDP), is likely to be adopted in 2013 promoting low taxation for businesses and imposing less stringent employment requirements. The ANC is pursuing this measure ahead of the 2014 national elections. The NDP will encourage partnerships between government and the private sector, creating opportunities in petrochemical industries, metalworking and refining, as well as development of power stations.

Construction companies are especially likely to benefit from government plans to invest $112-billion from 2013 in the expansion of infrastructure as part of the NDP. Some 18 strategic projects will be launched to expand transport, power and water, medical and educational infrastructure in some of the country's least developed areas.

Energy companies will also benefit, following the lifting of a moratorium on licences for shale gas development. Meanwhile, there will be significant opportunities, especially for Chinese state-owned enterprises that have recently made high-profile visits to South Africa, to acquire divested assets in the platinum and gold mining sector as large mining houses withdraw from South Africa.

According to government reports, the South African government will have spent R860-billion on new infrastructure projects in South Africa between 2009 and March 2013. In the energy sector, Eskom had put in place 675 kilometres of electricity transmission lines in 2012, to connect fast-growing economic centres and also to bring power to rural areas. More than 200 000 new households were connected to the national electricity grid in 2012. Construction work is also taking place in five cities including Cape Town, Port Elizabeth, Rustenburg, Durban and Pretoria to integrate different modes of transport.

Business Climate

Due to South Africa's well-developed and world-class business infrastructure, the country is ranked 35th out of 183 countries in the World Bank and International Finance Corporation's Doing Business 2012 report, an annual survey that measures the time, cost and hassle for businesses to comply with legal and administrative requirements. South Africa was ranked above developed countries such as Spain (44) and Luxembourg (50), as well as major developing economies such as Mexico (53), China (91), Russia (120), India (132) and Brazil (126).

The report found South Africa ranked first for ease of obtaining credit. This was based on depth of information and a reliable legal system.

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Foreign trade

South Africa's trade deficit narrowed to R 2.7-billion in December from R7.9-billion in November because of seasonal factors. The trade balance usually records a surplus in December due to a large decline in imports. Exports declined 9.8% over the month. The decrease was mainly driven by declines in the exports of base metals, vehicles, aircraft and vessels (down R1.1-billion), machinery and electrical appliances (down R0.9-billion) and prepared foodstuffs, beverages and tobacco (down 0.8-billion). Imports dropped 15.8% m-o-m.

Declines in the imports of machinery and electrical appliances (down R3.3-billion), original equipment components; (R1.8-billion), products of the chemicals or allied industries (R1.5-billion) and base metals and articles thereof (R1.2-billion) were the main drivers of the drop.

The large trade deficit for 2012 is one of the major reasons for the deterioration in the 2012 current account deficit forecast to 6.2% of GDP from 3.3% in 2011. South Africa's trade performance will remain weak in the coming months on the back of unfavourable global conditions and domestic supply disruptions. Weak global economic conditions will continue to influence exports and growth domestically.

Skills and education

The need to transform South Africa's education system has become ever more urgent, especially given the service delivery issues that have plagued the system. While government continues to allocate a significant amount of its budget to education (approximately 20%), it has not been enough to transform the schooling system. Coface expects the government to continue to support this critical sector, but that an opportunistic private sector will take advantage of government inefficiencies.

South Africa's education levels are quite low compared to other developed and developing nations. South Africa began restructuring its higher education system in 2003 to widen access to tertiary education and reset the priorities of the old apartheid-based system. Smaller universities and technikons (polytechnics) were incorporated into larger institutions to form comprehensive universities.

Debt

The total number of civil judgments recorded for debt in South Africa fell by 9.8% year on year in November 2012 to 35 268, according to data released by Statistics South Africa. The total number of civil judgments recorded for debt decreased by 15.2% in three months ended November 2012 compared with the three months ended November 2011.

The number of civil summonses issued for debt fell 23.9% year-on-year to 70 537. During November, the 35 268 civil judgments for debt amounted to R414.1-million, with the largest contributors being money lent, with R142.5-million. There was a 21.9% decrease in the total number of civil summonses issued for debt in the three months ended November last year compared with the same period in 2011. A 23.9% y-o-y decrease was recorded in November.

South Africa maintains respectable debt-to-GDP ratios, although these grew to 39% of GDP by end-2012, substantially higher than the 34% for emerging and developing economies as a whole. When Fitch downgraded SA earlier this year, it specifically mentioned concerns about South Africa's rising debt-to-GDP ratio, given that the ratio is higher than the country's peers.

South Africa is uniquely exposed to foreign investor sentiment through the deficit on the current account combined with liquid and deep fixed interest markets. Its widening deficit on the current account is a specific factor that concerns the rating agencies and is one of the metrics the agencies will use to assess its sovereign risk in the near future. Further downgrades are the risk - potentially driven by foreign investor sentiment about political risks.

Political landscape

Persistent unemployment, inequality and the mixed results of BEE (Black Economic Empowerment) intended to favour access to economic power by the historically disadvantaged populations have led to disappointment and resentment.

Social unrest is increasing. Recent events weakened the ruling coalition, which came under fire for its management of these events. Tensions could intensify in the run up to the 2014 presidential elections. South Africa has a well-developed legal system, but government inefficiency, a shortage of skilled labour, criminality and corruption are crippling the business environment. South Africa also has high and growing youth unemployment, high levels of visible inequality and government corruption, so we would keep an eye on the escalating service delivery protest trends.

Labour force

The unemployment rate fell to 24.9% in the fourth quarter of 2012 from 25.5% in the third quarter, mainly reflecting an increase in the number of discouraged work seekers. Over the quarter, 68 000 jobs were lost while the number discouraged work seekers rose by 87 000. The formal non-agricultural sector lost 52 000 jobs over the quarter, while the informal sector, in contrast, employed 8 000 more people. The breakdown shows that the highest number of jobs were lost in the private households category (48 000), followed by the trade and transport sectors, which shed 41 000 and 18 000 jobs respectively.

The agricultural sector led employment creation over the quarter, adding 24 000 jobs. Both local and international economic conditions are expected to improve only moderately during 2013.

Weak confidence and high wage settlement will make firms more cautious to expand capacity and employ more people this year. Government is likely to be the main driver of employment as it rolls out its infrastructure and job creation plans. The unemployment rate will therefore remain high in the short term.

Although the reduction in the unemployment rate is good news, it mainly reflects the large number of discouraged work seekers.