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Will South Africa get left behind in terms of international investment if it doesn’t improve its financial situation? How can we avoid this?
Will South Africa get left behind in terms of international investment if it doesn’t improve its financial situation? How can we avoid this?

The signs are here that South Africa has reached its economic crossroad

ECONOMIC NEWS

By Troy Henderson - Dec 3rd 2018, 11:37

While South Africa attempts to shore up its own economy amid high inflation rates and a stuttering inherited financial system, the continent as a whole continues to grow. The big question, though, is whether South Africa will get left behind in terms of international investment if it doesn’t improve its financial situation, and how to avoid this. 

The South African government has recently announced an Inclusive Growth Action Plan, amongst a whole raft of other economic policies which included redrafting budget funds to help fuel jobs and growth under the new presidential watch of Cyril Ramaphosa. Balancing this with land expropriation issues has slowed incoming investment. Of the R100 billion Ramaphosa said he needed to shore up state-owned companies and relieve the poorest of families, only R30 billion has been secured so far. The annual inflation rate continues at around 4-6% alongside rising transport, fuel and food prices - and it is unlikely these will be encouraging external investors.

This has left the country underperforming and carrying with it a poor credit rating. “We are in recession, we reported a contraction in the first quarter even with revisions, and now in the second quarter, with a fall of 0.7%, we are in recession” said statistician-general Risenga Maluleke. If these fiscal policies don’t work and the opposite happens, with economic recovery slow and borrowing costs rising, then international trade tensions will increase and the economy will have no other option than to remain sluggish with the recession actually deepening.

One real worry for South Africa is that it might not be as proportionally big an African fish as it once was. Combined with Nigeria, we represented almost 50% of the African economy’s GDP in 2017. The continent as a whole is growing, and Ethiopia and Rwanda specifically are the two fastest-growing economies. South Africa and Nigeria’s share is expected to drop to 37% by 2030. We are in the world’s second most populous continent with a young population, rapid urbanisation and increasing consumer spending, so there are certainly opportunities. Whether or not those opportunities will be fulfilled by South Africa or not depends on how quickly we can turn around our own financial issues.

While current inflation and fiscal worries are looking poor, investment remains our greatest strength. South African shares are performing well, recently nearing a 52-week high. This has a lot to do with the recovery of the mining industry, finance, real estate and business services. However, the rand is emerging as one of the most watched currencies, not necessarily thanks to its relative strength but because it is at its lowest since 2016. At the same time, every-day items continue to get more expensive for everyday South Africans. Annabel Bishop, an economist at Investec said, "while the Reserve Bank has emphasised [...] looking through volatile currency movements to the likely long-term impact on the inflation rate, even when the currency weakness is spread over a couple of months, the rand’s collapse has now been ongoing for four months."

Slowing investment and a devalued rand are clear signs that South Africa’s economy is severely troubled, making the region less attractive for investment. Add in rising unemployment, much of which is due to inequality issues as well as poor productivity from key sectors like agriculture on top of a legacy of a government that wasn’t pro-business, and the situation looks set to continue. In the short term, a weaker rand will help increase tourism, but this is scant consolation if South Africa loses ground on other African countries and cannot even fund state-owned entities. In the long term, the country is going to struggle to attract the type of investment needed to get itself back on its feet as the number one economy in Africa.

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