With South Africa lumped into the so-called “fragile five” group of emerging markets, the last thing it needed to reassure a nervous global investment community was to serve up more bleak economic data.
But that is exactly what happened as Pretoria revealed that economic growth slumped to a four-year low during the third quarter, as a series of wage-related strikes in the car, construction and mining industries battered activity. “We have been grouped with four other countries as the fragile five and we are living up to our name,” Thabi Leoka, economist at Renaissance Capital, says.
The fragile five – which on top of South Africa include Brazil, Turkey, India and Indonesia – are a group of big emerging economies deemed to be most at risk of a currency crisis once the US slows its quantitative easing programme.
Until about a year ago, several of the group were seen as locomotives of global economic growth. But now the International Monetary Fund, foreign investors and credit rating agencies are increasingly worried about their outlook.
South Africa on Tuesday said its economy expanded by a paltry 0.7 per cent on a quarter-on-quarter basis between July and September – sharply below the 3.2 per cent recorded in the previous quarter and below market expectations. The slowdown reinforced the feeble outlook for Africa’s largest economy as the country heads into elections next year and marks the 20th anniversary of the end of apartheid.
Annabel Bishop, group economist at Investec, said South Africa’s poor economic performance reflected structural problems. “The failure of South Africa to run at its potential economic growth rate, and so full employment, is an ingrained structural problem of poor education outcomes, labour rigidities and insufficient job creation,” she says.
The faltering economic performance has already forced the government to reduce its growth estimates for the year. Last week, the central bank forecast an expansion of just 1.9 per cent in 2013, down from 2.5 per cent in 2012, and well below the rate needed to tackle rampant unemployment and income disparity. Between 2004 and 2008, South Africa grew between 4.5 and 5.5 per cent annually.
Analysts warn that South Africa is at risk of further downgrades from influential credit rating agencies after next year’s elections if conditions fail to improve. Moody’s and Standard & Poor’s downgraded South Africa late last year, shortly after the country was hit by a wave of violent industrial unrest, while Fitch followed suit earlier this year.
Edward Parker, a managing director at Fitch, the rating agency, describes the picture as being “mixed,” saying South Africa’s strengths include a free-floating currency that acts as a shock absorber to global volatility, a strong banking sector and deep capital markets.
But he warns that if growth remains weak, the “country and the creditworthiness are likely to remain under pressure.” Fitch has South Africa on a stable outlook, while the other two main rating agencies have the country on negative outlook.
South Africa is also struggling with a widening current account deficit. Importantly, the deficit, which hit 6.5 per cent of GDP in the second quarter, has been partly financed by non-resident portfolio inflows. Economists worry that when the Fed starts tapering this would precipitate outflows from emerging market bonds.
The country’s currency has already been sucked into emerging markets turmoil triggered earlier this year by expectations that tapering was about to begin. The rand has depreciated by almost 20 per cent against the US dollar since January.
Mr Parker of Fitch says that “weak growth performance” was at the root of many key concerns. “[Weak growth] means it’s difficult to get the budget deficit down and stabilise the debt ratios; and it’s fuelling some of the social and political tensions.”
Strikes have continued to plague the economy this year, although the level of violence witnessed last year has not been repeated. Strikes in the motor industry, which lasted seven weeks and cost the producers thousands of vehicles in exports, had a damaging impact on third-quarter growth, with manufacturing contracting by 6.6 per cent on a quarter-on-quarter basis.
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