South Africa Growth Outlook 'Highly Promising'

South Africa, Turkey and Saudi Arabia are the markets with the most promising 10-year growth outlook, Bank of America Merrill Lynch says in a report on the long-term growth outlook for the EMEA countries – Europe, Middle East and Africa.

“Based on an analysis of growth determinants from demographics to leverage, we conclude that this decade Turkey, South Africa and Saudi Arabia will improve their growth performance,” the bank says.

“We see the highest average level of growth in Turkey (4.8%) and S. Africa (4.2%), with most of the rest of the region clustered between 3-4%,” the bank says.

South Africa: not spent yet

Under a heading South Africa: not spent yet, the bank forecasts that stronger-than-expected consumer spending and a stimulus from government investment on infrastructure is likely to boost growth to five percent between 2013 and 2016.

Without structural reform, economic growth is likely to fall back to a four percent trend pace, insufficient to meaningfully reduce very elevated unemployment, it predicts.

“We see sound reasons for a stronger than expected consumer story even though South Africa’s growth may look somewhat pedestrian compared with BRIC economies like China and India.

“We think the thrust of government policy – on jobs, infrastructure and service delivery – will provide the backdrop for positive consumer growth that is less driven by the middle class and more by lower income households migrating up the income ladder.

“Government infrastructural spending will also be a key boost to growth over the next several years.

“We estimate that the combination of upward surprises to consumer spending and public infrastructural spending should help boost growth to a five percent pace between 2013 and 2016,” the bank states.

Structural reform key to boosting growth

But it notes that structural reform is key to boosting growth in Africa’s richest state.

“Without efforts to address key headwinds to growth, for instance by alleviating the skills gap in the short-medium term via skilled immigration, revitalising the educational system, and through labour and product market reform, we think South Africa is likely to moderate back to a four percent pace of growth until 2020.

“If tough decisions are taken over the next few years, South Africa’s growth potential could accelerate beyond 2016 to six percent, in our view.

“The introduction of the national health system (NHI), while likely to be phased over a 15-year period, has the potential to be a significant headwind to growth via a growing fiscal and tax burden.”

The Bank of America Merill Lynch report also points out that a number of structural issues hamper South Africa’s ability to maximise economic growth and employment, in its view.

Three key constraints, it notes, are a skills mismatch, inflexible labour markets and onerous product market regulation.

On the skills issue, it says that the demand for unskilled labour has been declining over the past two decades as traditional labour intensive industries such as mining, agriculture and manufacturing have been in secular decline as the economy has orientated towards a more skills and services based footing.

“However, educational standards are very poor. Only 35% of South Africans over the age of 20 have a secondary school pass according to the SA Institute of Race Relations and there are only 26 PhD graduates per million of the population compared with 264 in Australia and 187 in South Korea.”

WEF Global Competitiveness Index

The report further notes that the World Economic Forum (WEF) Global Competitiveness Index shows South Africa’s ranking falling from 45 in 2008/9 to 54 in 2010/11, out of 139 countries. On labour market flexibility, South Africa slipped from 88 in 2008/09 to 97 in 2010/11.

“The underlying components show inflexible hiring and firing practices (135th), a lack of flexibility in wage determination by companies (131st), and poor labour-employer relations (132nd).

“These labour related weaknesses correspond to institutional strengths such as the accountability of private institutions (3rd), intellectual property protection (27th), property rights (29th), goods market efficiency (40th); financial market development (9th), business sophistication (38th); innovation (44th) and good scientific research institutions (29th).”

On onerous product market regulation, the bank notes that the OECD’s product market regulation (PMR) scores highlight that South Africa has more restrictive regulation than OECD economies and other EM economies like Brazil.

This is particularly in the areas of barriers to entrepreneurship and barriers to trade and investment.

“The OECD notes that SA firms complain of regulatory compliance complexity and complicated procedures for getting licences,” the bank adds.