Rise in social tension likely in SA
World Bank alarmed by inequality
SOUTH Africa’s problem of high unemployment and rising inequality could become more entrenched in the medium term, leading to a rise in social tensions, the World Bank said yesterday.
In its seventh edition of the South Africa Economic Update report, the World Bank noted China was still a major market for South African mineral exports and so this posed a risk to an already weak economic outlook for South Africa were there to be a sharp slow down in China.
It said South Africa’s large current account deficit, financed heavily by capital flows, made the economy vulnerable to shifts in investor sentiment and changing capital flows that could arise in the context of a fall out from the “lift-off” in interest rates in the US.
Volatile
The rand remained volatile yesterday and was flirting at R12.90 to the dollar. At one stage it was trading R12.9231, the local unit’s lowest level since December 2001, against the dollar before receding to R12.8781 at 6pm.
This was mainly a result of the dollar strength as concerns over Chinese devaluation of the yuan last week faded, said John Cairns, a currency strategist at Rand Merchant Bank.
Mohammed Nalla, the head of strategic research at Nedbank, said a confluence of factors have materialised over a short period of time and had served as a catalyst for an underlying vulnerability in emerging market currencies.
“The rand is oversold in the near term. However, for as long as R12.70 remains a floor, it appears to have established a weaker range, with only a break below this opening up further rand gains.”
Annabel Bishop, the chief economist at Investec, said she expected the rand to trade in a range of between R12.65 and R13.25 against the dollar this week.
She said the rand would likely not strengthen meaningfully ahead of the September 17 US interest rate decision.
“The R13.25 against the dollar is the weakest point I think the rand could reach this week,” she said.
The World Bank forecast South Africa’s real gross domestic product (GDP) growth at 2 percent this year, and to slowly strengthen to 2.4 percent in 2017.
This forecast comes on the eve of the release of the country’s GDP data for the second quarter next Tuesday.
This is significantly below the 4.1 percent quarter on quarter growth rate registered in the final quarter of 2014.
The report said overall, growth in South Africa would remain largely below the average growth of 4.2 percent and 4 percent for sub-Saharan Africa in 2015 and 2016/17.
It said while addressing power shortages would be critical to removing a key break on near-term growth, achieving the 5 percent growth target of the National Development Plan required much more than that.
“South Africa needs urgently to boost growth to this level if it is to provide jobs for young workers, address its growing social tensions and reduce its substantial poverty and inequality.”
The World Bank said improved labour relations for a start, matched by greater collaboration between the public and private sectors, and policy certainty to improve business environment, were fundamental to restoring investor confidence.
It said domestic factors continued to impede recovery in its economic growth.
Labour unrest and electricity shortages held headline GDP growth to just 1.5 percent in 2014, entrenching the moderation in economic activity evident since 2011.
Poverty rates
For the first time since 2009, aggregate economic growth fell short of population growth in 2014, reducing per capita real GDP by 0.4 percent to R55 712.
“Poverty and inequality rates are therefore likely to have stayed broadly unchanged from those recorded in 2010/11 household expenditure survey, where 21.7 percent of the population are below the food poverty line (R335 per capita per month) and the Gini coefficient of income inequality stood at 0.69.”
The World Bank said agricultural growth was expected to be pulled down in the near term by the poor maize harvest, but finance and business services are set to grow robustly throughout the forecast period.
Labour unrest and electricity shortages held headline GDP growth to just 1.5 percent in 2014.
Structural impediments would continue to weigh heavily on growth, the bank added.
These structural factors were reinforcing cyclical weakness in domestic demand.
Household consumption was expected to grow only modestly, while lower oil prices provided only temporary relief to household budgets and headline inflation, the report added.
It said concerns over electricity supply and rising input and wage costs were being compounded by broader commodity price weakness as well as policy and regulatory uncertainty, and were likely to dampen the outlook for investment, the report said.
Labour relations were expected to remain difficult in an environment of weak growth.
The World Bank said on the positive side, the recovery in advanced countries and still robust growth in sub-Saharan Africa should boost demand for South Africa’s non-mineral exports.
“Still, the anticipated weakness in mineral demand and prices limit the overall improvement in the current account deficit, which is expected to stay elevated at around 5 percent to 5.2 percent of GDP over the medium term.”