South Africa

Introduction

South Africa proudly celebrates the 20th anniversary of its first democratic elections this year. With the dawn of

democracy the country has moved out of almost two decades of stagnation and integrated into both the regional

and global economy.

Guided by sound fiscal and monetary policies, and with economic growth averaging about 3% over the past

decade (which included the impact of the global financial crisis), South Africa’s growth rate is, however, trending

below its potential. Higher growth could significantly impact the country’s socio-economic concerns of widening

inequality and poverty, as well as the burden of high unemployment. External factors, such as the lower

pedestrian global growth environment, less resource-intensive growth in China and softer international prices of

commodities, as well as internal factors, including industrial action resulting in production disruptions, and an

inflationary cost environment, have contributed to the slower growth trajectory.

In 2010, South Africa hosted the 2010 FIFA World Cup. This major international sporting event was an important

vehicle that promoted growth in key sectors such as tourism, infrastructure development and job creation. The

soccer tournament also enforced South Africa's international positioning on the world stage as a leading open

economy in Africa, a top travel tourism destination, with comparatively well-developed infrastructure, a relatively

sound policy environment and price competitiveness. Positive spill-overs of this event were reflected in nation

branding rankings of the country – undoubtedly building blocks to leverage further in terms of global trade,

investment and tourism linkages.

South Africa in the BRICS

Another significant nation branding milestone for South Africa was the invitation of the country to join the BRIC

(Brazil, Russia, India and China) grouping of emerging market nations, with South Africa’s inaugural participation

in 2011. Subsequently, the country hosted the 5th BRICS (Brazil, Russia, India, China and South Africa) Leaders’

Summit in Durban in March 2013. In fact, although the BRICS countries have seen a more sober growth

performance in the past year the drivers of economic activity are increasingly resting in emerging and developing

economies, underpinned by first-tier emerging markets which are recognised as the emerging leaders in global

trade and investment activities. Similarly, robust economic activity is expected to continue, particularly in Sub-

Saharan Africa (SSA) in resource-rich and lower income countries alike, as per capita incomes rise and

consumer demand starts to match extractive industries as a key driver of growth.

As the gradual shift in commercial activity from developed to emerging markets gain momentum, increasing

opportunities for investment in line with the urbanisation, integration, industrialisation and modernisation

requirements of emerging markets, and particularly African economies that are growing from a lower base, have

become evident. Africa is the second-fastest growing continent after Asia, with a population of more than 1 billion

persons, which is expected to double in less than 40 years. The continent showcases vast opportunities in

diverse sectors that investors from various geographies are eager to explore. This Africa Rising narrative is one

that South Africa and the continent’s leading capital city, the City of Tshwane, are particularly well-positioned to

facilitate and reap the benefits.

ECONOMIC OVERVIEW

Until April 2014, South Africa held the position of Africa’s largest economy, representing 40% of Africa’s

economic output, about 40% of its industrial output and 45% of mineral production. Following the rebasing of

Nigeria’s gross domestic product (GDP), South Africa is now the second largest economy, but still the most

sophisticated when evaluating indicators such as GDP composition, soundness of institutions, the regulatory,

legal and business environment, among other indicators, in Sub-Saharan Africa. It also accounts for about 60%

of Africa’s electricity generation and is regarded as an important springboard for corporates entering the

Southern African Development Community (SADC) and other parts of the African continent.

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Figure 1: South Africa, Africa and the World (%), 1994–2015

Source: IMF World Economic Outlook, April 2014

Real GDP figures for South Africa can be seen in figure 2. From this it can be observed that the economy grew

steadily prior to the financial crisis, but more important is the quick recovery from the financial crisis from 2009 to

2010. A similar picture can be seen when observing Real GDP per capita (see figure 3). GDP per capita showed

a quick recovery and a low growth after the financial crisis indicating that South Africa is successfully weathering

the aftershocks of the financial crisis.

[image]

Figure 2: South Africa Real GDP 1994–2013

Source: South African Reserve Bank

[image]

Figure 3: South Africa Real GDP per capita 1994–2013

Source: South African Reserve Bank

The composition of the South African economy is an important consideration and provides valuable insight into

sector growth and possible future opportunities. From figure 4 it can be observed that the tertiary sector is the

largest sector, followed by the secondary sector and lastly the primary sector. When investigating the individual

sector composition of the primary sector (see figure 5) it is observed that very little real growth has taken place.

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Figure 4: South Africa Real GVA by sector 1994–2013

Source: South African Reserve Bank

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Figure 5: South Africa Real GVA primary sector 1994–2013

Source: South African Reserve Bank

Manufacturing is the biggest contributor to the secondary sector (see figure 6), followed by construction. Despite

the relatively small size of construction it has been the fastest growing and the most resilient industry in the

secondary sector, as can be observed by the higher growth rates compared to the other industries in the sector.

[image]

Figure 6: South Africa Real GVA for the secondary sector 1994–2013

Source: South African Reserve Bank

Figure 7 and 8 indicate the real GVA and growth of the individual industries that make up the tertiary sector. The

fastest growing industry from 1994 is the financial services sector, followed by the growth in the transport,

government and social services.

[image]

Figure 7: South Africa Real GVA for the tertiary sector 1994–2013

Source: South African Reserve Bank

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Figure 8: South Africa Real GVA growth for the tertiary sector 1994–2013

Source: South African Reserve Bank

The composition of the South African economy plays an important role in determining the type and nature of

investment that enters into the country. However, equally important is the quality of the softer issues that attract

investors. Since the first democratic election the political stability and the rule of law as indicated in the World

Governance Indicators (World Bank, 2013). In figure 9 it is observed that the political stability has steadily

increased from 1996 to 2012.

[image]

Figure 9: Political stability in South Africa 1996–2012

Source: World Bank, Worldwide Governance Indicators

The rule of law indicator also increased and then stabilised, indicating a stable social environment where the law

is respected. When compared to the SADC the rule of law is significantly better in South Africa than on average

in the SADC (see figure 10).

1996 1998 2000 2002 2004 2006 2008 2010 20120.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Rule of Law SADC Moving average (Rule of Law SADC)Rule of Law South Africa Moving average (Rule of Law South Africa)

Figure 10: Rule of law in South Africa 1996–2012

Figure 11 is an excerpt of variable rankings achieved by South Africa in the Global Competitiveness Index (GCI)

study. The GCI is an index of 144 countries over 12 pillars of competitiveness that ranks each country

comparatively where 1 is the best and 144 is the worst (World Economic Forum, 2014). From figure 11, it is

observed that the strength and rigour of the financial system is amongst the best in the world. South Africa is

ranked first in the study with respect to the regulation of the securities exchange and auditing and financial

reporting rigour and quality. South Africa is also ranked amongst the top 10 in the sample with respect to the

soundness of banks, financial market development, financing through loan equity, availability of financial

services, accountability and the efficiency of the legal framework in changing regulation. Furthermore, South

Africa is ranked amongst the top 20 when it comes to legally settling disputes. Overall, South Africa’s global

competitiveness is ranked at 56, which is better than 88 other countries included in the study, which includes +

+9+69+6+Brazil (57), Hungary (60), Mexico (61), India (71), Botswana (74), Ukraine (76), Namibia (88), Kenya

(90), Argentina (104), Ghana (111), Côte d’Ivoire (115), Uganda (122), Zimbabwe (124), Mozambique (133) and

Angola (140).

Efficiency of legal framework in settling disputes

Efficiency of legal framework in challenging regs

Strength of auditing and reporting standards

Accountability

Availability of financial services

Financing through local equity market,

Soundness of banks,

Regulation of securities exchanges,

Financial market development

Global Competitiveness Index

0 10 20 30 40 50 60

15

9

1

2

6

3

6

1

7

56

Rank

Figure 11: Global competitiveness variables

Source: World Economic Forum, Global Competitiveness Index

The composition of the South African economy reflects its business sophistication as can be observed in figure

11. More than two thirds of the economy is service-based. Key sectors include the finance, insurance, real estate

and business services sector that constitute about 24% of the GDP, as well as community, social and personal

services (21% of GDP). This is followed by manufacturing (17%). Although still a major employment creator and

earner of foreign exchange, the mining and quarrying sector has declined from 10% in 2010 to 6% in 2012. Other

sectors, such as construction, constitute 3% of GDP, and energy and water as well as agriculture make the

lowest contribution at 2% each.

2,4%

5,6%

16,9%

1,9%

3,4%

14,0%

10,1%

24,2%

21,4%

1 Agriculture2 Mining3 Manufacturing4 Electricity5 Construction6 Trade7 Transport8 Finance9 Community services

Figure 12: Composition of South Africa’s economy (2005 constant prices), 2013

Source: South African Reserve Bank 2014

It is observed that South Africa is a majority tertiary and service driven economy, but does this composition

translate into subsequent international trade? When reviewing South Africa’s top ten commodity exports and

imports it can be observed that the overall top export commodities in rand value are ores, platinum, gold, metals,

vehicles and diamonds (see figure 13).

H8421: Centrifuges, including centrifugal dryers; filtering or purifying machinery and apparatus, for liquids or gases:

H7102: Diamonds, whether or not worked, but not mounted or set:

H8704: Motor vehicles for the transport of goods:

H2710: Petroleum oils and oils obtained from bituminous minerals (excluding crude); preparations not elsewhere specified or included, containing mass 70 per cent or more of petroleum oils or of oils obtained from bituminous minerals, these oils bein

H7202: Ferro-alloys:

H8703: Motor cars and other motor vehicles principally designed for the transport of persons (excluding those of heading 8702), including station wagons and racing cars:

H2701: Coal; briquettes, ovoids and similar solid fuels manufactured from coal:

H7108: Gold (including gold plated with platinum) unwrought or in semi-manufactured forms, or in powder form:

H7110: Platinum, unwrought or in semi-manufactured forms, or in powder form:

H2601: Iron ores and concentrates, including roasted iron pyrites:

0 50,000,000,000 100,000,000,000

Figure 13: Top export commodities in Rand 2013

The top import commodities are petroleum, aluminium, coal, wheat, rice, cement and sugar (see figure 14).

H1701: Cane or beet sugar and chemically pure sucrose, in solid form:

H3102: Mineral or chemical fertilizers, nitrogenous:

H2523: Portland cement, aluminous cement, slag cement, super sulphate cement and similar hydraulic cements, whether or not coloured or in the form of clinkers:

H1006: Rice:

H1001: Wheat and meslin:

H2818: Artificial corundum, whether or not chemically defined; aluminium oxide; aluminium hydroxide:

H2701: Coal; briquettes, ovoids and similar solid fuels manufactured from coal:

H2711: Petroleum gases and other gaseous hydrocarbons:

H2710: Petroleum oils and oils obtained from bituminous minerals (excluding crude); preparations not elsewhere specified or included, containing mass 70 per cent or more of petroleum oils or of oils obtained from bituminous minerals, these oils bein

H2709: Petroleum oils and oils obtained from bituminous minerals, crude

0 10,000,000,000 20,000,000,000

Figure 14: Top import commodities in Rand 2013

Over the past 20 years, the South African government has implemented various policies and programmes to

address and correct economic imbalances of the past, and the resultant socio-economic ills. These have

included the Reconstruction and Development Programme (RDP), Growth Employment and Redistribution

(GEAR) and the Accelerated and Shared Growth Initiative of South Africa (ASGI-SA) policies, with a focus on

spurring economic growth and local employment opportunities.

The Growth Employment and Redistribution (GEAR) Policy focused on similar goals as identified in the RDP,

namely to create a competitive fast growing economy that creates sufficient job opportunities and that

redistributes income to combat income disparities created in the past. It also strives for an economy that has

properly functioning health, education and services sectors that are freely available to all and to create an

environment where people can live and work safely (RSA, 1996: 1). The GEAR Policy further proposed to

transform the South African economy through developing an outward orientated economy that actively assists

and develops industries.

The successor to the GEAR Policy is the ASGI-SA Policy that focused significantly on poverty reduction through

job creation, stating that ASGI-SA aims to reduce poverty by half in 2014 (RSA, 2007). The focus in the policy is

to develop a dynamic and inclusive economy that has a diversified industrial sector, reduced labour costs, value

added products, services and sustainable employment (RSA, 2007). Six binding constraints were identified:

The volatility and level of currency.

The cost, efficiency and capacity of the national logistics system.

Shortage of suitably skilled labour amplified by the cost effects on labour of apartheid spatial patterns.

Barriers to entry, limits to competition and limited new investment opportunities.

Regulatory environment and the burden on small and medium businesses.

Deficiencies in state organisation, capacity and leadership.

More recently, the New Growth Path (NGP) released in 2010 is a framework which is premised on the fact that

South Africa’s economy needs to be restructured, become more inclusive and dynamic, and expand at a faster

rate in order to address the triple burden of unemployment, inequality and poverty. As the first economic policy

with a sharpened focus on job creation, the plan put forward key employment creating sectors.

This framework was further elaborated upon by the comprehensive National Development Plan (NDP) 2030,

released by the National Planning Commission in November 2011. With the same objective, the plan outlines a

number of thematic focus areas that need to be addressed in order for this to be achieved, and puts forth a

roadmap towards 2030.

All the macroeconomic framework policies mention the development of the economy through poverty reduction

and development of a vibrant inclusive economy, either directly or indirectly. It is clear that the South African

government and in turn – through section 41 of the Constitution (RSA, 1996) – the City of Tshwane is dedicated

to developing an inclusive, diversified environment where industry, labour and market forces can function

efficiently and fairly to the benefit of its citizens and the South African economy.

The overarching macroeconomic goals have remained unchanged since the RDP. This does not mean that the

goals have not been met. On the contrary, significant progress has been made. The continued focus and altering

approaches indicates the dedication of government, and by association, the City of Tshwane, to the improvement

of the welfare of its citizens.