The Economy of South Africa

The Economy of South Africa

Introduction

Economies which have downgraded to a junk state tend to be characterized by a high GDP to debt ratio. The Republic of Ireland and Slovenia have recovered from the same situation. Notably, such economies have experienced a decline due to a collapse of Primary Industries. The country’s national development plan aims at eliminating poverty and reducing inequality. The program will be achieved by the year 2030. The attainment of the goal will capitalize on the efforts of the citizens, building capacities as well as creating an inclusive economy (Deléchat et al., 2018). Also, the country will ensure that leadership and partnerships are encouraged throughout the society to achieve the national development plan (Maia, Mondi and Roberts, 2005). The national development plan is for the whole country, and the process will utilize evidence-based monitoring and evaluation.

However, the national development plan has not got successfully implemented. The levels of poverty in the country are still high. The issue gets linked to the high unemployment rate resulting from the declining economy. Also, inequality is quite high because a few own most of the country’s resources. The largest population in the country is currently living in poverty (Hendriks, 2013).

       Responses from the Three Rating Agencies

The three rating agencies have noted that South Africa’s Economy has downgraded to a junk state. Fitch, which is one of the leading rating agencies, stated that country’s growing external debts is one crucial reason why the economy has declined. Fitch has noted that the government debt to GDP ratio is increasing at a high rate. Egypt was previously downgraded to junk by Fitch in the year 2002, and since then, the country has not recovered its investment rating. Therefore, the same trend might happen in the case of South Africa.

Notably, Moody has noted that the economy downgraded to a junk state because of the country’s local and foreign currency debt. The rating agency noted that in the wake of the Coronavirus pandemic, the economy had fallen below the investment grade. Also, the fiscal strength has deteriorated, and economic growth is structurally weak. S&P has gone to affirm the economy’s junk state. S&P states that the GDP growth is too low, the fiscal deficits are increasing, and the public debt is growing. The three metrics, according to S&P, are indicators of a declining economy. Economic

Performance of the Economy since 1994

            Since the year 1994, South Africa has gone through a period characterized by massive industrialization. Over less than 13 years, the country’s GDP almost tripled. Notably, the average GDP over the period was $400 billion (Zack, 2014). Mining and quarrying, as well as manufacturing, were the key sectors contributing to the growth. The country’s gold mining activities provided a precious mineral which would be exported. However, the country’s economy has gone through a period of decline since the year 2011. In the past eight years, the GDP has declined to $385 billion (Gumata and Ndou, 2019). The fall is linked to internal issues like corruption, political instability, shortage of skilled workforce and government bureaucracy. In the year 2019, the country’s economy declined to a junk state. The market for gold and manufactured good faced a massive decline leading to a low GDP.

Factors Contributing to the Decline of South Africa’s Economy

One of the critical reasons why the economy has faced a recession is due to a lack of reliable power sources for the production sector. Most countries with vibrant economies tend to rely on stable power sources. However, the case of South Africa is worrying. The primary industries have often suffered from frequent power outages. Also, the cost of power supply has escalated, making the production cost too high. The electricity supply crisis is the biggest single crisis the country has faced in recent years (Gumata and Ndou, 2019). Eskom, which acts as the leading power supplier in the country, is currently unable to guarantee the country reliable electricity.

Additionally, the fiscal crisis the country has previously faced has contributed to the economic slump. The country’s budgetary metrics have significantly deteriorated over the past decade. Notably, South Africa’s public debt to GDP ratio has risen from 24% to 60% in just ten years (Sobukwe, 2018). Financial experts have warned that the rate will increase further if steps to reverse the trend are not taken. The fiscal deficit at 6.5% of GDP is way above the acceptable levels for the country (Department of Finance, 2006). The other financial crisis which has contributed to the deterioration of the economy is that the debt servicing costs have grown at a high rate in the significant areas of the government’s expenditure. Currently, South African is falling into a debt trap which is a worrying occurrence for a developing country.

Studies and analysis have indicated that some monetary policies have contributed to the decline in the country’s economy. Notably, the issue of persistently raising interest rates to reduce the money supply has hurt the Economy (Sobukwe, 2018). The government has raised such interest rates intending to reduce demand for money. The Plan has led to the contraction of the economy, which is a sign of poor performance.

Features of the Macro Policies

Countries across the world tend to use macroeconomic policies to provide a stable economic environment that is conducive for healthy and sustainable economic progress.  The key pillars for South Africa’s economic policies are the monetary, fiscal as well as exchange rate policies (Edo, Osadolor and Dading, 2019). The policies have defined characteristics for the case of the South African Economy. One of the critical features of the macro policies is that the interest rates are quite high. Such rates aim at reducing the supply for money in the country. The feature has contributed to the decline of the country’s Economy (Nell, 2018). The interest rates are too high for the state to stimulate a consistent growth of the economy.

The other notable feature of such policies is that there is stability in the inflation rates in the country. The rates have levelled off between 4.58, and 6.3 % and experts expect it to stabilize at 5%. Over the past few years, the South African Reserve Bank has aimed at keeping the inflation rate in the range of 3-6% (Hoffmann and Schnabl, 2016). The country can capitalize on these low rates of inflation to reverse the declining economy. With the prices of essential commodities being low, private and public investments will increase to improve the economy.

The country’s exchange rates have been flexible over the past few years.  The value of South Africa’s rand, just like other commodities, is determined by the market forces of demand and supply. The current weakness of the rand has resulted from various economic issues South Africa is facing. Structural problems the economy is facing have led to the weakening of the rand compared to currencies from other countries (Kalyoncu, 2005). Other factors as leading to the issue include the existing current account deficit. The deficit has resulted from the country’s heavy reliance on external borrowing. The weakening currency often leads to other problems. For instance, economic analysts expect that the inflation rates in the country are likely to go up. However, the rand is not too weak to stimulate economic growth (Mqoqi, 2014).

National Development Plan (NDP)

The national development plan was developed by different groups of people who reside in South Africa. The Plan was aimed at ensuring that the residents live in a poverty-free country where employment opportunities get evenly distributed.  The goals were to be achieved through capitalizing on the efforts of the citizens. Also, the country would grow an inclusive economy while building on the capabilities of the residents. Additionally, South Africa would promote leadership and partnerships to recover from the decline (Deléchat et al., 2018). The Plan was aimed at creating an inclusive economy where employment opportunities are evenly distributed in the society. However, the South African citizens are still struggling with poverty.

The Plan is still relevant in the country. South Africa has made advances in building an inclusive society. The country has managed to broaden the available opportunities to ensure that the community has access to job openings, education, and other essential services. The poverty rate in South Africa has declined, and incomes have grown steadily (Hendriks, 2013). The inequality among the citizens has reduced in recent years. Therefore, the national development plan is still relevant in the country.

Industrial Policy

South Africa is known for its sound industrial policy. The industrial policy action plan (IPAP) aims at addressing the critical challenges of industrial and economic growth. The program also aims at eliminating race-based poverty in the country while addressing inequality and unemployment in the nation.  The government has the sole responsibility for implementing the Plan. Notably, the program will focus on ten essential themes while focusing on most of the sectors of the Economy (Viviers and Steenkamp, 2012). The key topics include growing the economy, setting up the country’s export efforts creating and enforcing policy certainty, among others.

The critical sectors the Plan focuses on include advanced manufacturing, aerospace and defence, and agro-processing as well as business process services. Proper implementation of the policy plan will lead to the recovery of the sinking Economy (Zalk, 2014). The goal is still relevant in the country as its implementation aims at addressing economic and industrial challenges.  The policy can be improved by creating a platform for specific sector interventions (Meyer, 2014). The responses will assist in addressing internal and external structural constraints which affect the sectors.

Monetary Policy

The monetary policy, which was set by the South African Reserve Bank aims at achieving and maintaining price stability. Also, the Plan has focused on supervising a healthy banking sector in the country. One of the critical features of the monetary system is that it aims at achieving as well as maintaining price stability (Branson and Leibbrandt, 2013). The balance gets produced at the moment when changes in general prices do not affect the economic decisions in the country. The inflation targets set in the monetary policy tend to be altered frequently (Chirwa and Odhiambo, 2015). The main aim of this aspect in the financial system is achieving a full disinflation in the country.

The other feature is that the critical elements are set by a monetary policy committee which comprises of seven members (Morris, Kaplinsky and Kaplan, 2012). The monetary policy has specific objectives that it aims at achieving.  The goals include stabilizing the prices to avoid inflation and controlling the prevailing interest rates in the country. Research indicates that the monetary policy aims at enhancing accountability while improving transparency in the nation’s financial decisions (Breakfast, 2015). Notably, attaining stability in real and nominal interest rates is one of the crucial activities which contribute to the recovery of a declining economy.

Role of South Africa Reserve Bank in Igniting Growth

Role in Inspiring Foreign Direct investment

The South African Reserve Bank can ignite growth and inspire confidence in foreign direct investment. The goals are achievable through cutting down the interest rates, and this will encourage growth and foreign investment in the country (Sender, 2012). The interest rates will help foreign investors to take loans from banks and invest in other sectors of the economy. The investment will, in turn, lead to economic growth. Regulating the rate of inflation will encourage consumption in the country. The country’s population will demand more goods, and this will stimulate more production (Zarenda, 2013). Therefore, foreign direct investors will be attracted to make more investments in the country.

Role in Creating Effective Fiscal Policies

The best fiscal policy which the country requires to encourage economic growth involves increasing government spending. The activity will boost the aggregate demand for goods and services produced in the country (Ndhambi, 2015). Therefore, industries will deliver more products at the process will end up requiring more employees. Job opportunities will hence emerge for the unemployed citizens. Fiscal consolidation is necessary for the country. The reason why the process is essential is that economic growth gets impeded when there is a conflict between policies (Fedderke, 2014). Consolidating the systems will assist in achieving uniform goals which the government has set. Consolidation of such policies will have its own set of advantages. Notably, consumption and investment will benefit from the strategy. The rates of inflation and interest will stabilize, and the public will be encouraged to consume more. Domestic and foreign investors will also make more investment input in the sector.

Structural Adjustments Required

The declining economy requires structural adjustments to stimulate growth. One of the changes necessary involves focusing on the labour-intensive sectors like agro-processing. The segments will assist in creating employment for the population, and this will stimulate economic growth (Mlambo-Ngcuka, 2006). Focusing on such sectors will involve investing in more finances in the industries. Other structural changes needed to stimulate growth and encourage job creation are increasing access to higher education and greater participation in international markets (Chagunda, 2006). Also, the country needs to create an environment for local and foreign entrepreneurs. South Africa should establish a fair and robust labour market to reduce unemployment levels among its citizens. The strategy has worked in other junk economies like the Republic of Ireland and Slovenia.

Structural changes are required in both the primary and secondary sectors. For instance, the mining and quarrying sector form the single largest component of the primary segment. The industry is currently in an irreversible decline. The decline of the industry results from changes in supply and demand patterns. On the demand side, gold has lost its previous use as a store of value. The issue is related to the latest trend of most central banks in most countries selling their gold reserves (Breakfast, 2015). Presence of an abundant supply of gold in the market has led to a massive decline in the prices. The final result in the case of South Africa is that most of the gold mines have become unprofitable and hence halting their operations. The country should adjust the prices of gold to match those set by the forces of demand and supply.

The secondary sector requires structural adjustments to reverse the downgrading economy. Most of the manufacturing entities in the country have spent several years serving the domestic market. However, the 1994 trade liberalization put their dominant position under threat (Breakfast, 2015). The years of inward industrialization has made the firm less competitive in international markets. Structural adjustments are necessary for successful entry into the highly competitive global markets.

The trajectory of the economy

The future of South Africa’s economy is likely to be worse than the current situation. Notably, the emergence of the Coronavirus pandemic might plunge the economy into a crisis. Currently, the economy is in a recession, and the major industries which largely contributed to the nation’s GDP have already halted operations. Household consumption has already declined due to the current lockdown aimed at controlling the spread of the infection. Therefore, if the crisis is not controlled in the next six months, the economy will decline further in future. Also, the national debt will end up increasing because the government is using most of the resources to deal with the pandemic. The fiscal deficit will also increase in future. The GDP may end up declining beyond the current $385 billion in the next one year (Nel, 2017). Recovering from this decline will take several years because the global market is also in crisis because of the Coronavirus.

Conclusion and Recommendations

Poor performance indicators in the country include rising levels of poverty and unemployment. Also, falling gross domestic products as well as per capita income indicate a declining economy. Therefore, steps ought to be implemented to reverse the trend. For instance, there is a need for structural changes to rescue the declining economy. Such structural changes will include making significant investments in the labour-intensive sectors of the economy. Such areas will end up absorbing more of the unemployed citizens hence reducing the unemployment levels in the country. South Africa should adopt this strategy which has worked in other declining economies like South Korea, Slovenia and Hungary.

Low-interest rates in the banking sector tend to entice investors to borrow finances from banking institutions to invest in the critical areas of the economy. Good fiscal and financial policies should be drafted to stimulate economic growth. The inflation levels should remain as low as possible to encourage more consumption. Also, the increased consumption of goods will encourage the manufacturers to increase production activities, and this will boost the country’s GDP. Reversing the falling economy will also call for an alternative source of power supply to the industries. Most of the manufacturing and processing companies have often suffered from power outages, and this is one of the factors affecting economic performance.

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