Amid a backdrop of a global slowdown, high unemployment and continuing social upheaval, the South African economy is slowly reviving. James Eedes reports.

The South African economy grew at an annualised rate of 2.2% in the first quarter of this year, according to figures released by the South African Reserve Bank, too slow to have any impact on the country’s alarming unemployment problem but fairly robust given the global slowdown.

Yet for impatient South Africans and sceptical investors, this is not good enough. Unemployment is running at 26%, according to government agency Statistics SA. Real GDP growth is being eroded by population increases. Wealth redistribution is not happening fast enough – just under half the population lives in poverty. And crime, HIV/Aids and the brain drain are all taking their toll.

Look again

On closer inspection, though, the situation is a lot brighter. Firstly, government finances are in excellent health. Spending has been reigned in and revenue collections dramatically improved. The result is a budget deficit of 1.4% this year and government debt down to 43% of GDP from 48% five years ago. Fiscal discipline allowed the National Treasury to hand back R15bn ($1.48bn) in tax cuts and boost capital spending on infrastructure.

Secondly, there are growing signs that a coherent industrial policy is emerging. Although there has been a clear intent to move the South African economy away from import substitution to export-led growth, the government has been slow to flesh out the details.

The unveiling of the Department of Trade and Industry’s integrated manufacturing strategy has filled in some of the blanks. The plan envisions specific interventions to move enterprises or sectors in the direction of knowledge-intensive, value-adding growth.

The plan focuses on key sectors with strong growth potential: clothing and textiles; agro-processing; metals and minerals; tourism; automotive and transport; crafts; chemicals and biotechnology; and knowledge intensive services.

Competitive intent

The common intention throughout is to push these sectors to global competitiveness, encourage value-adding manufacturing and service provision, provide sustainable employment and grow exports. This will be achieved by aggressive promotion of South African goods, which includes gaining preferential access to developed markets, plus targeted inward investment. Necessarily, the process also includes an overhaul of investment incentives, tariff structures and other micro-level government interventions.

The success of the Motor Industry Development Programme (MIDP), which in six years has seen total automotive exports jump from R4.8bn to R35bn, is testament to what can be achieved. The MIDP has gradually brought tariffs down, exposing the local auto sector to increased competition, but provided allowances on new investment that would improve global competitiveness. Above all, the MIDP provided long-term policy certainty, meaning companies could invest with peace of mind.

The results are encouraging. Toyota SA will invest R3.5bn over the next three to four years. Bridgestone Firestone SA, the local subsidiary of the Japanese tyre multinational, will invest a further R100m over the next two years. BMW announced a R2.2bn investment in its plant at the end of last year. And DaimlerChrysler has spent R1.4bn on its East London operations.

The Department of Trade and Industry is also addressing many of the issues critical to accelerated growth and development. This includes trying to address the HIV/Aids problem. The national government, and in particular President Thabo Mbeki, have backed down on their support for the dissident view on the disease – that HIV does not cause Aids. It has opened the way for antiretroviral treatments and mother-to-child prevention programmes to be extended. This comes on the back of increased national spending to combat the disease plus a R1.8bn grant from the Global Aids Fund.

According to research by pharmaceutical company Bristol-Myers Squibb, the rate of HIV affection appears to have slowed dramatically, from 3.6% in 1993–1994 to 0.3% last year. It is too early to say that the epidemic has stabilised, the company says, but the evidence is encouraging.

There are also signs that corporate South Africa is targeting the problem effectively. National electricity utility Eskom has seen the rate of infection among its 35,000 staff members drop from 12% in 1995 to 9% this year. Seven years ago it was predicting that one quarter of its workforce would be infected by 2003.

Access to markets

A crucial element to an export-led growth strategy is gaining access to markets. Here again the South African government scores well on it performance. The free trade pact negotiated with the European Union will eliminate customs duties on more than 90% of all goods traded between South Africa and the EU over the next 12 years. In 2000, the first year of the agreement, South African exports to the region shot up 35%. Against the backdrop of a slowing global economy in 2001, during which EU imports fell 0.3%, South African exports to the EU grew a further 11%. In effect, exports are up 50% in two years.

SA out in front

South Africa has now overtaken important competitors, notably Algeria, Saudi Arabia, Malaysia and Singapore, in terms of exports to the EU. South Africa’s trade surplus with the EU grew from R6bn in 1999 to R30bn last year, according to the European Commission’s statistical office, Eurostat. The EU is South Africa’s most important trading partner, accounting for more than 40% of South Africa’s imports and exports and 70% of its FDI.

South African companies are also capitalising on the US-initiated African Growth and Opportunity Act (Agoa), which provides duty-free status to clothing and textiles imported from selected African countries. Exports from South Africa to the US surged to $270m in the first quarter of the year, according to the US embassy in South Africa, an increase of 83%.

All products listed under Agoa will have duty-free tariffs for a fixed period of eight years up to September 2008.

Overall, the value of merchandise exports (seasonally adjusted and annualised) rose by 14.3% in the first quarter of 2002. Increases were recorded in all the main export sub-categories though mining products fared appreciably better than others. This improvement combined with a sizeable decline in net factor payments – dividends to offshore parent companies being a bugbear for South Africa – helped turn around the current account deficit at the end of 2001 into a surplus at the end of the first quarter of 2002.

The beleaguered domestic currency, the rand, received some much-needed support. After suffering last year, the currency has since been the top performer against the dollar. It now trades around R10.10 against the dollar but is susceptible to volatile swings in sentiment.

Rand’s fall hurts

The rand’s depreciation did not leave the South African economy unscathed. Consumer prices are up 8.4% over the past 12 months, driven primarily by the imported component and food prices that have tracked hard currency commodity prices. To temper price pressures, and in particular inflationary expectations, the South African Reserve Bank has had to hike interest rates three times this year.

It is a temporary aberration. There is little indication that domestic demand pressures are fuelling price rises. Household consumption expenditure was up just 3% in the first quarter this year, slowing from the previous quarter. Even then, there is considerable surplus production capacity in the economy. The index of the utilisation of production capacity stood at 80.6% at the end of the first quarter.

Economists expect inflation to peak towards the end of the third quarter, assuming a relatively stable exchange rate. Thereafter, the 12-month figures should fall rapidly, paving the way for interest rate cuts. With renewed interest in (undervalued) South African financial assets by portfolio investors, the rand should hold its ground for some time.