South Africa: Moving On Up

The economy of South Africa has been in an upswing since September 1999, the business quarter after Nelson Mandela was elected to his second term as president of the new republic. During this decade just past, the nation has diversified from its traditional mining and minerals base and transformed itself into a pragmatic, fiscally conservative, mostly free market economy, with a few minor problems along the way.

In the second quarter of 2008 South Africa’s gross domestic product (GDP) rose by 4.9%. The largest chunk of that growth, 2.3%, arose from manufacturing, including surging metals and automotive industries; the remainder was balanced across all sectors, including mining (0.8%) and agriculture and finance (each 0.5%). In the midst of a global slowdown, such figures are impressive, made more so by the fact that South Africa is a net exporter hungry for international markets not only for their commodities but for their value-added exports, as well. To top it off, the government is running a surplus.

Mining

The 2008 commodities boom has been good for South Africa, which produces around 80% of global platinum and 10% of gold as its two largest exports. Other major commodity exports include chromium, vanadium, manganese, titanium, coal—oh, yes, and diamonds. South Africa remains one of the top four diamond mining nations in the world and is rapidly becoming a center for grading and cutting both diamonds and colored gemstones, as well.

The percentage of the nation’s GDP that’s earned by mining and quarrying has fallen steadily as South Africa has diversified its industry base, dropping from around 14% in the 1970s and 1980s to its current level of 5.8%. However, at 21% of total exports, it’s still a major source of income for the nation and one of the largest employment sectors, as well.

Measuring the trade balance is difficult in a rather small economy where diamonds and colored gemstones are routinely imported then re-exported later, so monthly fluctuations are best ignored. The June trade data, the most recent figures available, show a deficit of US$1.9 billion, one of the largest on record.

However, the commodities boom brought not only benefits for export nations but also high inflation, and South Africa has been hit much harder in that regard than Australia, Canada or New Zealand. Consumer prices including foods are 13.4% higher in July 2008 than they were in July 2007, while producer prices surged 18.9%, trimming profit margins boosted by the boom.

Fighting Inflation

In an attempt to fight that inflation, South Africa has jacked their intrabank interest rate to a jaw-dropping 12.0%. Retail credit, of course, is even higher, with credit cards soaring to 25% to 27% p.a. while mortgage rates in double digits have homebuyers staggering. Remember that this is a nation where unemployment has not fallen below 20% since the turn of the century, and the government statistics for the second quarter of 2008 show that 23.1% of the nation’s workers aren’t. The apartheid here has nothing to do with race; there’s seven percentage points difference between the male and female unemployment levels.

South Africa’s developed infrastructure suffered decades of neglect during the turmoil of bringing down apartheid, and in January 2008 this neglect came home to roost with a vengeance when the electrical power supply proved unable to meet the rising demand, resulting in “load shedding” (read blackouts) across the nation. This was bad enough in shopping malls and residential areas, with defunct traffic lights causing massive gridlocks in Johannesburg and frustrated commuters setting the electric trains afire in Pretoria.

But when the underground mines were warned their power supply could not be guaranteed, they quit production at a loss of export revenue estimated at US$82 million per day. Platinum prices soared to $2,276 per ounce—not good news for automakers, which purchase more than half of the world’s platinum for the manufacture of catalytic converters. However, as coal to provide that electricity is one of those mined resources that were shut down, this obviously wasn’t going to work, and the mines reopened five days later on 90% power rationing.

Eskom, the national utility company supplying 95% of South Africa’s electricity, is scrambling to expand their reserve capacity, although “load shedding” isn’t going away anytime soon. Meanwhile, small businesses are investing in generators, and the civil population has been asked to cut back on their electricity usage as much as possible to keep the wheels of industry turning.

Power to the people. Power from the people.

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