Tuesday, December 28, 2004

How well is South Africa's economy doing?

Let's talk about a few of the "facts." I don't have all the data I'd like to have at my disposal here, so expect ongoing edits to this post.

South Africa's economy has seldom seen it so good. Some say this is all retail-led and should be export-led. Economists will tell you that endogenous or exogenous growth both equal growth.

Fact wise, there are some worrying signs for SA's economy. I work with executives of many top company's and my standard discussion pack includes an economic health check. Growth in SA has been fuelled by massive credit binging as interest rates have dropped. This is not in itself bad as long as inflation remains in check. If employment does not increase with spending, then inflation will result. And so to indicator number one: employment has not increased substantially. In fact some growing areas of the economy are shedding jobs. These productivity improvements carry a mixed message: they are fantastic news from a competitiveness perspective - without them, SA will slip further behind the top countries from a competitiveness perspective. But they are not good from a jobs perspective. Here the economists will say that ultimately this is good as these ex-employees relocate to areas of the economy that can absorb their numbers and skills (see for example the diagnosis of offshoring of US jobs - economic diagnosis: good). Big problem number one and two. First of all, we're lousy at pinpointing where our country's competitive advantages lie and what to do about them. The apartheid government did a fairly good job with ISCOR, SASOL and ESKOM (and therefore the downstream industries). But maybe they just got lucky, focusing on sanctions busting rather than exports ;) Sadly, these companies exploit our mineral wealth and not our human capital. Worringly, rhetoric from some quarters of government has talked of steering production to labour-for-technology substitution - hopefully this is just some idea spouting. Number two, it takes massive time and effort to reskill labour (particularly in the unskilled market) - typically through programmes over generations of workers.

Another aspect of the credit-led growth is that some of this is based on some savers giving up on their futures during the market downturn of 2001-2002. As people saw their pensions wither many spent rather than saved believing that it was not worth saving for tomorrow. This is a disaster we have yet to reap. SA has abysmal savings rates.

Exports are worrying. I have not yet done the analysis of the mining industry to have a fact based opinion on whether they are whinging unnecessarily or not. I am a little suspicious: mines made out like bandits as the rand crashed to R13 to the dollar. If the rand has merely retreated to previous levels, their only basis for complaining would be if increases in costs had outpaced increases in the mineral prices - and gold and platinum are substantially up. Unfortunately, the stronger rand will have exposed marginal mines that are just not cost competitive. Anyway, simple analysis that I will do in the new year.

But other export sectors are bleeding. Clothing and agriculture saw the flooding of their markets with cheap high quality competition in the late nineties. The crashing rand provided temporary relief. Again, it is better that the economy focuses on areas of true competitive advantage rather than disguise them through a perpetually depreciating rand. Make no mistake: a country cannot merely deflate a currency once and then stabilise it to kick start / right-size exports. This provides a temporary protection and damages many other areas (most significantly foreign investor perception - no one wants to put dollars in at a price and then have to return double to get the same amount out - investors want stability).

Is the rand stronger or strong? Of course much of the rand performance against the dollar is made up of dollar weakness, but the rand has done well against the Euro and the pound too. The big mac index (see below) shows us undervalued on a purchasing power parity basis. In a developing economy, this is not unusual. I must find historical values, but I can never remember the discount being as low as at present.

December 2004 Big Mac Index - The Economist

Based on the above it is difficult to get very excited by SAs economics. But what is exciting is the improving sentiment (business and consumer). The reason economics is a social science and not part of finance is because human behaviour is so inextricably intertwined in economic outcomes. With improved consumer and business sentiment, while economic growth may not be translating into jobs in the factory sense, it is very possible that money is trickling down into the informal economy. This is Mbeki's second economy and if it can be nurtured it holds the promise of gradual upliftment while the massive jobs programmes are initiated. But they must be initiated...

Certain parts of government have done an amazing job. SA has never had a minister of finance so skilled at building a stable economic platform (2002 rand spike aside). While we all worried when Mboweni came in, he has managed the markets rather well. And SARS is a revenue collection machine.

But other parts of the machine must click into gear (excuse the horrible pun). There has been woeful performance by the development finance institutions. Funds have not found their way to job creation and coordination has been woeful. The public works programme offers a wonderful opportunity to kickstart this. But other industry programmes will also be needed, focused on industries where SA can build competitive advantage in the long term.

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