2. 30
S
outh Africa’s prosperity in the first decade of this millennium is widely regarded
as being attributable to two main underlying factors, the first being government’s
commitment to fiscal prudence which began with the much maligned Growth
Employment and Redistribution (GEAR) programme in 1997. This allowed South Africa
to benefit from increasing commodity prices, which led to the second factor, namely
an emerging market boom and the corresponding increase in commodity prices. However,
since 2012, South Africa’s economy has all but stagnated which begs the question of what went
wrong and what plans should be put in place or implemented to remedy the situation.
As a Wealth Manager it is important to explain to investment clients the history of the South
African economic growth policy since the country became a democracy in 1994. With
the ANC coming into power, it led to the implementation of the Growth Employment and
Redistribution (GEAR) in 1996, where it was later replaced with the Shared Growth Initiative
for South Africa (AGISA) in 2005 and then the New Growth Path (NGP) and the current
National Development Plan (NDP) as of 2013.
This is important as it highlights the forever changing Government policy. The GEAR
implementation was a result of the failure of delivery of the Reconstruction and Development
Programme (RDP), which was a socio-economic programme to establish a more equal society
through reconstruction and development and to strengthen the democracy of South Africa.
However, due to poor fiscal and economic legacy as a result of Apartheid, and ignoring the
collection of new taxes, it focused on fiscal prudence and the reallocation of existing revenues,
where the project was ultimately unsuccessful.
The GEAR policy improved the fiscal deficit, inflation and government consumption targets and
most notably the reversal of the negative GDP growth rate from the early ‘90s. This improved
macroeconomic stability, however, it had failed to reduce poverty and employment creation.
In 2005, AGISA was introduced to tackle the challenges faced with poverty as a result of
unemployment. It had the goal of halving the employment rate from 28% to 14% by 2012.
However, when President Jacob Zuma was elected, he introduced the NGP during his State of the
Nation Address in 2010. This policy aimed to rapidly reduce poverty, inequality and the high levels
of unemployment. The NDP has since been introduced in 2013 as a long term socio-economic
development roadmap until 2030.
By Sean Johnston,
Property Investment Strategist
IGrow Wealth Investments
South African
Economy
3. At present, South Africa needs fast economic growth to reduce the high
levels of unemployment. At this moment in time, South Africa has the
highest level of unemployment in the world, according to OECD, with
25.4%. This has not been forthcoming due to the lack of resources to
invest in the knowledge economy through research and development,
infrastructure and tertiary education. South Africa has therefore struggled
to meet economic forecasts.
Another reason, is due to the wastage of Government spending, policy
experimentation and cronyism. With the constitutional court ruling
Jacob Zuma to payback the public funds on the renovation of his
private homestead, this has led to other political parties calling for his
impeachment as the head of state. This instability in leadership has
deterred foreign investors in investing in South Africa. This was further
expressed with the firing of former finance minister, Nhlanhla Nene, in
December 2015, resulting in the Rand weakening sharply against foreign
currencies such as the US Dollar, trading at R15.51 by the end of 2015.
Other factors that have resulted in lacklustre growth is the current
electricity constraint by Eskom. Shortages and hiking prices of electricity
have hampered growth for the economy. Load shedding and lost revenue
for businesses is impacting the economic growth forecasting. With the lack
of dependable electricity, this will damper the economic growth for up to a
decade until a power plant is built to handle the current electricity load.
The weak recovery of the global economy after the crisis, particularly
in Europe, impacted South Africa due to imports and exports of goods
to increase economic growth. This too has resulted in South Africa
struggling to improve economic growth.
China, which is world’s second biggest economy by country, has
cushioned South Africa since the 2008 financial crisis due to the
demand of commodities such as mineral resources. However, this
demand will be impacted as China transitions from an investment
spending economy to a consumer spending one.
If South Africa has its international credit rating reduced to 'junk status'
by the rating agencies, this will have an enormous impact on growth
prospects with raised cost of debt and a decline in investor confidence.
In order for a client to make an informed decision, it is needed to
understand the South African environment and its impact on local asset
classes and their potential performance over the medium to long term.
There is an opportunity for investors to invest their capital in either
Rand-denominated investments, where you are invested in offshore
funds, but capital never physically leaves South Africa, or invest directly
offshore following the exchange control process. The most common
offshore currency being the US Dollar.
With the Rand weakening against the US Dollar and staggered economic
growth, it would be beneficial for investors to diversify their portfolios and
have greater exposure to offshore investments in stronger currencies, if the
risk appetite of an investor meets the risks parameters of offshore exposure.
What went wrong?
Economy:
Economy
