South Africa will weather the economic storm

Economist Mike Schussler doesn’t dispute the recent financial crisis will cause short-term macroeconomic problems, but he suspects we may already be seeing the worst of it. South Africa’s long-term economic prospects, he insists, are very promising.
Issue date : 24 October 2008

- Advertisement -

I have a major effect on commodity prices and input costs. In the short term the world economy is going to slow down to 3,7% growth. Financial markets will be horrible for quite a while and be in the headlines for two to three years. The US has the world’s biggest economy, which some say is heading for a recession. Even though their credit crisis is affecting the world’s economy, emerging markets continue to grow at a rate of 5%. But the long-term outlook is more optimistic due to the major shift in the world’s economy.

Developing countries now make up almost 60% of the world’s economy, and every year 14 million to 15 million new consumers join the market. By consumers, I mean people who aren’t worried where their next meal is coming from, with more education and buying power. These millions are changing the way the world works with millions of people working smarter, working harder, and owning their own homes. With productivity driving world growth, the long-term effect on the world’s economy is very positive.

The South African outlook
South Africa is going through a different transition. In 1994 sanctions were dropped, together with the high tariff walls protecting us, and we suddenly found we weren’t competitive. We had to become so, and fast. Today, South Africa is experiencing high population growth, and a lot of South Africans are much richer than expected. We make more cars than babies, have 45 million cell phones, and 71% of us own our own homes. Things are tough, but the average South African is doing okay. We’re still moving forward, even if it is, at times, at half the pace.

- Advertisement -

Our weak spot is that our trade balance and our cheque books are in the red. We export more goods and services than we import, and rely on capital in-flows, such as bonds and the stock market, all of which point to the rand heading south. Our government has a lot of manoeuvring room as government debt is around 27% of gross domestic product (GDP), with a world average of around 75% of GDP. But while the state says it believes in our future, they aren’t investing in it. In the 1960s government provided 40% of fixed investment, today it provides only 16%. In contrast, the private sector invests 73%.

Advice to farmers
My advice to farmers is to monitor input costs this year, next year and the year after, and as closely as possible. Manufacturers are pushing price rises through and we should see commodity prices remain relatively high in the long run, but with the financial crisis and the slowdown of the world economy, commodities might not be quite as high. In the next few months they’ll probably come down a little, but they’ll start heading up again in two to three years. I don’t think food commodities are in a bubble, because of new consumers, emerging markets, and supply-side support as land is diverted to biofuel production. But consumers won’t buy into biofuel unless it’s hugely subsidised – prices aren’t compelling.

The inflation picture certainly isn’t rosy. CPIX has gone to 13,5% and next year we think it’s going to be around the 8% mark. When you’re coming from a high base, inflation works as follows – if you have a R100 and you have a R10 increase, it’s a 10% increase. If you have a R10 on R200, it’s only a 5% increase. So while we come from a high base, inflation will drop, but not enough. Household expenditure is a major problem, and high interest rates are putting consumers under immense pressure. They start buying down, like buying maize instead of bread. The ratio of household debt to disposable income in South Africa is over 75%. Nominal wage increases will be around 12% with a 100 basis points margin either way. Prime will go to around 15,5% and stay there a year before dropping back. I doubt interest rates will decline before April/May 2009.

The world is in an electricity crisis, with various countries all needing electricity. Countries are building gas turbines that run on diesel, and South Africa already has two gas turbines. Burning about 50 000â„“ in 23 hours, these turbines are going to cause a diesel shortage, and we might see diesel at US/â„“ (R308/â„“) above the oil price. It may come down in the short term, but next year and the year after, it will remain higher. This year and next year will be hard times to grow, but a lot of factors will help, not just tourism for 2010 but also infrastructure projects. Manufacturers, as soon as they have electricity, will enter building phases. The slowdown should last 22 to 26 months. The middle part will be quite severe and I think we might be experiencing it now. This country needs you in agriculture. If we had to import all the products we produce, we’d be in the same state as Zimbabwe. – Rudi Massyn |fw