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The SA economy has its work cut out for it and businesses (and risk managers) need to brace themselves

Posted By Administration, 18 July 2013

Nedbank economist, Nicky Weimar, delivered the key note address at the IRMSA Annual General Meeting held recently in Johannesburg. Her focus was to give an analysis of the South African economy, its outlook and prospects for 2013 and beyond.

Weimar’s analysis was that the South African economy is somewhat stagnant and that structural constraints are the main impediments to Gross Domestic Product (GDP) growth of over 3%. She observes that although South Africa is out of recession, a key concern is a loss of growth momentum in the economy.

During the 1st quarter of 2013, the SA economy grew by a meagre 0.9% and Weimar predicts that growth will be in the (unimpressive) region of 2% for 2013. This level of economic growth makes a little difference in dealing with challenges such as unemployment, poverty and addressing inequalities in our society.

The slow rate of economic growth is mainly due to some areas of the economy not being at optimal performance. Weimar puts the spotlight on the mining, manufacturing and utilities (water and electricity) sectors are key problem areas. "The instability seen in 2012, our loss of competitiveness in manufacturing as well as delays with our new power stations are causing major problems for our economy,” comments Weimer. She believes that when new power stations are completed there will be a good stimulus for the economy.

Weimar observes the following structural economic factors:

· Fading international competitiveness

· High electricity costs

· Rising unit labour costs - above inflation wage growth versus fading productivity.

· Hostile relationship between business and labour (employers and employees) – strikes.

· Poor service delivery which raises the cost and risk of doing business – red tape and corruption at local authority level and among provincial government(s).

· Expensive and often unreliable transport and logistics Private sector’s ability to expand operations.

· Persistent policy uncertainty – although greater clarity is emerging through the National Budget and NDP

"These problems are specific to South Africa and they are issues that only we can resolve,” argues Weimar. She points we are the worst performing developing country in terms of economic growth and she believes this is mainly due to these structural factors. She believes that the private sector will continue to remain hesitant to expand its capacity if these issues are not addressed.

Another factor contributing to the economic is poor world economic environment, however this is more cyclical and affects many countries around the world including South Africa. In terms of the global economic situation, one of the key problems for South Africa is that it is heavily exposed to the Eurozone.

In excess of 20% of the SA economy is with the countries in the Eurozone and most of them are experiencing major economic problems. Another constraint is South Africa’s weak exports and this is a further constrain to economic growth.

However, she is encouraged by the fact that government expenditure is still driving growth albeit at a predictably modest pace. The key challenge for the government is to reduce the budget deficit which is critical for the country to avoid any further credit rating downgrade. In addition, the growing wage bill has to be contained to ensure better management of our economy.

Weimar points out that the public sector infrastructure drive planned for the next couple of years as good news for our economy. Also, that South Africa continues to get the required capital inflows it needs (also subject to credit rating). She indicates that the South African Reserve Bank has very little scope around rates and Weimar does not believe that there will be major changes at least for the remainder of this year.

Overall, the SA economy’s volatile state will only be resolved when government and all players in the economy to play their part in helping the economy recover.

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