Why is South Africa’s Economy Slowing Down?

Why is South Africa’s Economy Slowing Down?

Once upon a time in South Africa, anything seemed possible.

While it may often be forgotten today, amidst reports of its present economic and political woes, South Africa’s peaceful transition of power from its tiny, powerful white minority (descended from Dutch and British settlers) to its black majority was an unprecedented (and never again repeated) event. Contrast the jubilant celebration of Mandela’s election with the situation in other former colonies such as Zimbabwe, which famously expelled white farmers in an ill-advised attempt at land reform.

But today, some twenty-three years after Mandela’s fateful election, statistics paint a very mixed picture of South Africa’s overall health. Despite some successes (most notably in startups and technology sector), the nation remains starkly divided, with a large inequality gap, rampant government corruption, weak leadership, and economic stagnation.

So what went wrong? Why is South Africa’s economy, once the envy of its regional neighbors, slowing down so much? How did this proud nation see its credit rating cut to junk status earlier this year?

In short, a perfect storm of political crises, growing income inequality, and slowing exports.

Political turmoil

It’s a truism that the business community prizes political and social stability. After all, whatever your stance may be on regulations (or the lack thereof), it’s important to understand that without a stable society, it becomes exceedingly difficult to conduct business.

But that stability is precisely what South Africa, at the moment, is lacking. Over the span of two years, the nation has seen three finance ministers sacked: Nhlanhla Nene, a seasoned politician who served for many years in Parliament (sacked in 2014); David van Rooyen (a relatively unknown lawmaker who lasted less than a week); and finally, the highly respected Pravin Gordhan, widely perceived as a capable leader with extensive experience in government.

Gordhan was replaced in March 2017 by Malusi Gigaba, who trotted out a classic populist line about returning the economy to the people, and fighting against “big business, powerful interests, and international investors.” But this rhetoric concealed a troubling rumor: Gordhan was dismissed because he fought corruption, specifically for standing against President Jacob Zuma’s ambitions to reform the ruling party, the African National Congress (ANC). Some even speculated that, like Nene before him, Gordhan’s firing was related to President Zuma’s dealings with the shadowy Gupta clan, a powerful family of entrepreneurs accused of spectacular, brazen corruption.

This instability has direct results, as well: the South African rand, which had already seen considerable decline after Nene’s sudden removal (and later, talk of Gordhan’s imminent firing), dropped even further. When Gordhan was finally, formally removed, the rand plummeted by 4% against the dollar, a stunning setback to the currency, which had seen a slow recovery over the past year.

The root of many of these crises, however, stem from corruption–particularly at the top. Notably, President Zuma, aside from his already controversial transactions with the Gupta family, has also been accused of embezzlement. In 2009, the President spent some 65 million rand of government money on renovations for his private estate. Though Zuma’s office attempted to block a 2016 report by a fact-finding committee, ultimately, the details came out: private concerns like the Guptas were, in fact, bribing and pressuring government officials to create preferential, advantageous legislation.

The response was furious–though it gained spectacular momentum following Gordhan’s forced departure. Calls for Zuma’s resignation quickly morphed into street demonstrations, and were followed by the downgrading of South Africa’s credit rating.

Slowing Growth

Aside from the aforementioned corruption scandals, the ailing commodities sector was yet another key culprit. In 2016, Stats SA found that the country’s GDP slowed to 0.3%, with the biggest contractions occurring in industries like mining, manufacturing, and quarrying. Despite the nation’s reputation as a tech haven, some 57% of South Africa’s economy is still composed of commodities, which have been hard hit by declining worldwide demand over the past several years. In fact, the frail export market has led to a significant decrease in the value of the rand, causing it to drop to an all-time low of 18 rand per dollar in 2016.

Yet another sector that has seen more than its share of difficulties is agriculture; long famous for its wines and olive oil, this sector was once heralded as a potential savior, with the promise of nearly one million jobs–which unfortunately, turned out to be overblown as employers use seasonal workers and face uncertainty in the form of new legislation and loss of investment.

To make things worse, South African farmers are also facing the worst drought in more than a century, which forced the agricultural sector to shrink by nearly 14%. Coupled with inflationary pressures and poor farm output, food costs are rising by as much as 6.2%, resulting in a grim overall outlook for the nation’s economy.

Growing income inequality

In some ways, South Africa’s intense inequality is related to the stagnant economy. After all, more growth means more jobs, more income, and a better chance at upward mobility–but with such pronounced wealth gap, growth may not be likely to happen in the first place.

Today, South Africa is one of the most unequal nations in the world; 10% of the population earns nearly 55-60% of all income (in other economies, this share is 20-35%). South Africa also scores quite poorly on the Gini coefficient (0.660 to 0.696), a measure of inequality that ranges from 0-1 (1 being the most unequal); in short, the nation is one of the most consistently unequal societies in the world.

The looming challenges are quite massive, as well: unemployment is an all-time high, especially amongst the young, who face unemployment rates of 65.5% (for recent graduates) and approximately 40% (for older Millennials aged 25-34). Women, in particular, face much higher unemployment rates, with nearly 29.3% (or 2.8 million) going without a job.

The one upside…

The lack of growth and economic inequality can be traced directly back to the recession, which hit the nation particularly hard; from 2008-9, an estimated one million jobs were lost, many of which have yet to be recovered.

But what if tech were the answer? After all, South Africa’s robust startup scene is the one bright spot in an increasingly dismal economic landscape. One key advantage for South Africa’s startups lies with the rand: because of its weakness, it’s far easier to do two things: either attract foreign talent, specifically founders, coders, and marketers, with a lower cost of living; or build a low-cost operation with high profit margins by selling overseas.

If anything, South African tech is only growing stronger: during 2015, $54.6 million was raised in South Africa, far surpassing Nigeria and Kenya, both of which have larger (and better-known) startup ecosystems. Innovation abounds too, as the nation has produced a number of promising stars, such as Custos Media, which uses bitcoin bounties to reduce digital piracy, and Cape, a WiFi network and quality monitor that recently raised millions of dollars in funding from American venture capitalists.

Ultimately, for all its challenges, South Africa may well overcome its unfortunate economic and political situation. Doing so, however, will first require removing corruption from government, as well as opening up economic opportunities to the vast majority of its population. Whether tech can serve as the engine of economic change remains, however, to be seen.

2017-06-19T14:52:46+00:00 May 2nd, 2017|Global Markets, Investments|0 Comments

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