South Africa: Macroeconomic challenges after a decade of success¹

Abstract

More than halfway through the decade, the South African economy has done very well. This report asks whether such achievements provide grounds for complacency. In particular it discusses the current account challenge in light of the Accelerated and Shared Growth Initiative for South Africa (ASGI-SA) program. Our assessment is that a cautionary note on the need to reduce external imbalances is needed. We provide policy recommendations to minimize the negative impact of a possible sudden stop of capital inflows. On the consistency of ASGI-SA program, we note that, given South Africa's recent employment and productivity performance a large investment program would be required to deliver the desired growth Initiative-South Africa (ASGI-SA) proposal, external imbalances are poised to widen further. Furthermore, in the context of an increase in consumer debt ratios, consumers are exposed to a sudden increase in interest rates. What do these risks imply for policy decisions?Pursuing these motivations, we address several specific questions. First we ask about the sustainability of the current trends in the South African economy. What are the drivers of the current boom? Is this a demand-driven expansion with little potential for sustainability? Will growth be constrained by external factors? We find that the expansion is driven by a mild consumption boom (mostly durables) and an increase in investment. But the increase in investment has focused on the non-tradable sector, thus auguring future imbalances. When we use the BER's and the Treasury's macro model to simulate the future path of the economy, we find that without an exogenous improvement in the terms of trade, South Africa will show increasing external imbalances.Given the size of external imbalances, we discuss the possibility of a sudden stop to capital inflows, as in the late-1990s (a possibility that has become more topical with recent global financial market turmoil) and what implications such a sudden stop would have for the South African economy. Were it to materialize, how prepared is the South African economy to deal with it? A period of interest rate tightening in the large economies might precipitate a reversal of the booms in commodities and emerging markets that developed over the preceding five years. How vulnerable is the South African economy to such a sudden stop to capital inflows? We find that the South African economy is much better prepared than other emerging economies, but would still undergo an adjustment if a sudden stop did occur: output would stagnate, consumption would fall, and the government accounts would deteriorate. Thus, we explore a series of actions that may decrease this vulnerability.We then turn to an analysis of the consistency of the ASGI-SA program. The program is fairly comprehensive, including proposals in a wide range of areas. From a macro perspective the main question relates to the fact that ASGI-SA anticipates a sizable increase in public investment. But how will this increase in investment be financed, and what is ...

Human capital and economic growth in South Africa: A cross-municipality panel data analysis

“…A commodity boom period between 2004 and 2007 also affirmed the country's global Background: In the literature, human capital has been identified as a key economic variable that is needed to promote growth; hence this study explores the components of human capital, that is, different skill levels in order to capture the real effect of the employed labour on economic output across the municipalities of South Africa. standing in trade (Frankel, Smit & Sturzenegger 2008). However, the global financial crisis of 2008-2009 resulted in a significant decline in South Africa's exports and jobs (South African Reserve Bank 2009).…”