South Africa only joined the BRICS – Brazil, Russia, India and China – for their 3rd BRICS Summit in 2011. And ‘once upon a time’ all of the five countries were predicted to become the future drivers of world economic growth, but – like many forecasts – this turned out to be far from what really happened. Brazil and Russia face a recession, China is in the news every day for fighting the economy’s slowdown and India struggles with economic reforms (Foroohar, 2015). What about South Africa? Its story does not look much better either…
First things first. Let’s look at South Africa’s output over the last years. The diagram above shows South Africa’s GDP per capita over the last decade from 2004 to 2014. GDP per capita at Purchasing Power Parity stood at $12,449 in 2014 compared to $10,715 in 2004. Ergo this is a 16.2 percent increase over the decade. However, this distorts the picture because most of the growth happened in the period until 2008. During the global financial crisis (GFC) GDP per capita fell by more than 2.9 percent. In its aftermath South Africa has experienced sluggish growth rates relative to the 2000s. In 2014 GDP per capita actually fell by -0.04 percent which is a sign of stagnation or the next recession.
Another important factor in the story is that South Africa has been running a current account deficit over the last decade which rose to more than 19 billion in 2014 after a temporary drop in 2010 and 2011. This means that South Africa is a net borrower from abroad, i.e. it spends more than it earns. In order to do so it needs to attract investment inflows (mainly FDI) from abroad in its financial account.
The diagram above decomposes South Africa’s current account deficit. It stems from both a large net primary income deficit and a merchandise trade deficit since 2012. The former are caused by investment income payments that South Africa makes to foreign direct investors. These are interest and dividend payments to foreign holders of bonds and other debt as well as foreign stockholders (Strauss, 2015). The latter merely stem from the fact that the value of imports exceed the value of exports.
South Africa is a natural resource based exporter (Kowalski, Lattimore, & Bottini, 2009). Among South Africa’s exports the single most important category is platinum, followed by iron ores, gold and coal. It is also an exporter of machinery like motor cars. Main imports are oil and other commodities, machinery and equipment (UN Comtrade and UN Service Trade, n.d.). An important point here is that its trade pattern is leaning towards mineral resources and this a double-edged sword. On the one hand, there are large potential gains from the country’s natural resource endowment and it has been a driver of South Africa’s trade. On the other hand, world commodity prices are highly volatile causing macro-economic instability in an economy. What is more, natural resources can be a curse for economic growth without economic development. They are by no means a guarantee for economic development; these would need at least parallel investments in human and physical capital if not more attention in other areas (Kowalski et al., 2009).
Importantly, both merchandise and services trade have not yet surpassed pre-downturn levels. This is a clear indicator for the country’s poor recovery. Merchandise trade did pick up again after the GFC from 45.9 percent to 60.8 percent of South Africa’s GDP in 2014. However, it already stood at 63.6 percent in 2008. Likewise commercial services exports recovered somewhat to 9.7 percent of GDP in 2014. In comparison, they were already at 10.8 percent in 2008. One should note that while services exports are not nearly as large as merchandise exports they are still important for the economy with travel services (tourism) being by far the most important category. South Africa makes use of its revealed comparative advantage in this area with supply of natural environment, climate, history and diverse cultures (Fourie, 2010).
Lastly, what is of greatest concern currently is the threat of a second debt crisis. For this, we might need a little bit of historical background to put it into context. South Africa faced a debt crisis after the end of apartheid in 1994 due to rising public debt and large debt-service costs. It responded with government spending cuts and succeeded in turning its fiscal deficit into a surplus combined with a large reduction in public debt. However, since 2009 under the new president Jacob Zuma public debt has risen again together with crippling debt-service costs (The Economist, 2015).
External debt stocks are now at an all-time high of 42.3 percent of GNI and South Africa is heading towards a debt crisis fueled by low commodity prices and a weak world economy. Furthermore a strong dollar increases the country’s burden of external debt (Steyn, 2016). To avert a second debt crisis the 2016 budget plan by South Africa’s finance minister includes fiscal consolidation and structural reforms. The latter are channeled through the National Development Plan (NDP) with the goal to raise long-run growth rates (Sy, 2016). It remains questionable whether this will be enough reduce debt back to its early 2000 levels.
There is clearly more to the issue of South Africa’s recent weak performance than the three aspects of GDP per capita, balance of payments and external debt in today’s post. Examples are inflation and the persistently low employment rate as well as unequal labour market outcomes. There is high youth unemployment and high unemployment among black South Africans. Both have hampered the country’s prospects and cause concerns over equal opportunities in the job market. For example unemployment among black South African youth stood at a crippling rate of 39.4 percent in 2014, i.e. more than one out of three, while this figure was only 9.4 percent for white youth (Statistics South Africa, n.d.).
In sum, South Africa’s prospects seem to have reversed after the GFC and a weak recovery coupled with skyrocketing debt are dragging down the economy and hamper economic growth. The economy is also vulnerable firstly due to it being a natural resource based exporter suffering from the recent drop in commodity prices and secondly due to its external debt and the associated exchange rate risk (strong dollar) that comes with it. It seems that the next debt crisis is under way together with stagnation or the next recession. It remains questionable whether government policies such as the 2016 budget plan are enough to reverse these recent adverse trends and enable South Africa to live up to BRICS expectations.
Thanks for reading!
Forohaar, R. (2015). Why the Mighty BRIC Nations Have Finally Broken. Retrieved from http://time.com/4106094/goldman-sachs-brics/
Fourie, J. (2010). The Development and Importance of Travel Service Exports from South Africa. SAJEMS, 14(2), pp.210-288.
Kowalski, P., Lattimore, R., & Bottini, N. (2009). Globalisation and Emerging Economies: Brazil, Russia, India, Indonesia, China and South Africa: OECD Publishing. Retrieved from http://dx.doi.org/10.1787/9789264044814-13-en
Statistics South Africa (n.d.). Employment, unemployment, skills and economic growth: An exploration of household survey evidence on skills development and unemployment between 1994 and 2014. Retrieved from http://www.statssa.gov.za/presentation/Stats%20SA%20presentation%20on%20skills%20and%20unemployment_16%20September.pdf
Steyn, L. (2016). Are we heading for an African debt crisis? Retrieved from http://mg.co.za/article/2016-02-11-are-we-heading-for-an-african-debt-crisis
Strauss, I. (2015). Understanding South Africa’s current account deficit: The role of foreign direct investment income. Chief Economist Complex: Africa Economic Brief, 6(4), 13.
Sy, A. (2016, February 26, 2016). South Africa’s 2016 budget: Will Gordhan’s gradual approach deliver? Retrieved from http://www.brookings.edu/blogs/africa-in-focus/posts/2016/02/26-south-africa-budget-sy
The Economist (2015). South Africa gets a rating downgrade. Retrieved from http://www.economist.com/news/middle-east-and-africa/21679693-mismanagement-and-magical-thinking-are-driving-rainbow-nation-debt
UN Comtrade and UN Service Trade (n.d.) South Africa 2013. Retrieved from http://comtrade.un.org/pb/FileFetch.aspx?docID=5358&type=country%20pages
World Bank (2016). World Development Indicators. [data] Retrieved from World Development Indicators (WDI) database: http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators&preview=on