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SA Economic outlook

​Colin Coleman – Goldman Sachs ​

Without urgent action, South Africa will be caught in a low growth trap, with rising domestic social pressures and the approaching storm from global headwinds, Goldman Sachs’ head of Investment Banking for Sub-Saharan Africa, Colin Coleman told a recent Forum at GIBS in Johannesburg.

While recent economic trends in South Africa are not cause for panic, the country should not be complacent. A deep domestic financial market underpins South Africa’s resilience, as well as respected institutions such as the South African Reserve Bank, a strong country balance sheet and a flexible exchange rate. 

Despite this, Coleman cautioned:  “Strong economic management, leadership and policy co-ordination are urgently required to put the country on a sustainable growth path.” 

He explained that the global economy is currently in the third wave of the financial crisis, with emerging markets at its epicenter. As such, Goldman Sachs had downgraded its forecast for South Africa’s GDP growth to 1,2% for 2015 and 1,5% for 2016. 

Main risks to the South African economy 
Coleman called South Africa’s 1,4% GDP growth rate “a massive underperformance on our potential. And in times of rising social tensions and lowered economic prospects, it is simply unsustainable.” 

He named labour conflicts, energy supply disruptions, weak public sector output and the failures of state owned enterprises “self-inflicted” macro problems.  
Recent social disruption, including the service delivery and student protests and industrial action, were a result of a leadership vacuum and a lack of decisive action. Coleman said one of business’ main concerns is the likelihood of South Africa having an ‘Arab Spring’ moment. 

Despite monetary and fiscal progress, structural unemployment has persisted in the country: “We haven’t managed to get the kind of growth that efficiently drives unemployment down,” Coleman said.  

The likelihood of a fiscal crisis 
South Africa has a moderate chance of descending into a financial crisis - a scenario caused by a combination of current account deficit, the level of foreign exchange reserves, degree of currency overvaluation and GDP growth. 

South Africa’s debt to GDP ratio is a particular warning light. After ‘stress testing’ South Africa for fiscal crisis, Goldman Sachs found that there was a low probability of a sudden stop scenario, where large investors stop making further investments into the country and portfolio flows cease.

In the event of a financial crisis, South Africa’s low levels of foreign debt and an unpegged currency would provide a significant cushion: “Our external balance sheet means we have low levels of dollar-denominated debt and our flexible exchange rate is a positive asset,” Coleman said.  

However, falling bond and equity inflows would put pressure on the SARB’s net reserves, as the funding of South Africa’s fiscal deficit and public debt makes the country vulnerable to portfolio flow reversal.

Achieving 3,2% GDP growth
In order to return South Africa to 3,2% GDP growth, last achieved in 2011, Coleman said the country must innovate in high employment and productivity sectors such as tourism, high value add manufacturing and services such as private education and healthcare which could be exported into Africa. 

In order to achieve this target, Coleman proposed the immediate priorities of the current administration should be: 
To stabilise mining and support high growth industries such as tourism;
Stabilise labour relations;
Lift outputs from investments in health, education and infrastructure;
Clamp down on underperforming and corrupt SOEs, including accelerate progress at Eskom; 
Identify ways to engage unemployed youth in productive activities; and 
Coordinating economic policy and cross sectional decision-making.

Achieving 5% GDP growth 
Accomplishing 5% GDP growth for South Africa, necessary in order to halve unemployment by 2030 as per the National Development Plan, would mean implementing some ambitious policies.

Coleman proposed a 5-year interdependent package of fiscally neutral initiatives to stimulate employment, growth and reduce unemployment, which would include: 

A labour accord stability pact, introducing a minimum wage and guaranteeing a predictable labour environment;
A national youth service initiative;
Fiscal stimulus to incentivise 300 000 new small and medium enterprises each year; and 
A programme to modernise state owned enterprises, including raising private capital and improving governance. 

“There are going to have to be compromises and we are going to have to negotiate our way through this. There is very little foreign direct investment into South Africa at present, and we are going to have to transform before this will improve,” Coleman concluded. 

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