The recent FPA conference, Africa Emerging (see this link), touched on a number of important themes related to Africa’s improving economic performance and the formidable challenges that lie ahead. One theme echoed louder than all the rest — the necessity for investment in human capital — in education and health care. As in most discussions about country risk over the last thirty years, the issue of “sequencing” of reforms is critical to the African case. Should democracy precede economic liberalization or vice versa? No ready answer is apparent, but what is clear is that without strides in human development, sustainable progress on economic and democratic development will be much less likely in Africa. Investment in Africa’s people, so that jobs can be part of the region’s recent economic boom (with annual GDP growth rates above 5% in recent years, versus 2-3% per year in the 1980s-90s), will be critical to the Africa story.
Africa’s most nagging development challenges include:
From Fitch Ratings:
Fitch Ratings-London-13 January 2012: Fitch Ratings has affirmed South Africa’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘BBB+’ and ‘A’ respectively. The Outlooks on the Long-term IDRs have been revised to Negative from Stable. Fitch has simultaneously affirmed South Africa’s Short-term IDR at ‘F2’ and Country Ceiling at ‘A’.
“The Negative Outlook reflects the limited progress on several long-standing structural issues that have over time caused South Africa’s economic performance to fall behind its peers,” says Purvi Harlalka, Director in Fitch’s Sovereigns group. “Not least of the problems that require urgent attention is the economy’s inability to create sufficient jobs for its labour force. This inability has not only constrained growth and kept the tax base narrow but has also caused public finances to become increasingly redistributive in an effort to address the lack of social mobility. The resultant narrowing of fiscal space undermines a key support to South Africa’s creditworthiness,” adds Ms Harlalka.
GDP growth has averaged 2.7% over the past five years, compared to a ‘BBB’ peer group average of 3%. The gap in per capita growth is even wider. Estimates of potential growth have been revised down to around 4% and such a pace is unlikely to be achieved in the next few years without an acceleration of structural reforms. The employment rate is a low 40% and unemployment stuck at 25%. The political challenge presented by these issues will increase over time.
South Africa’s public finances, though still a rating strength, are no longer such a stand out strength compared to peers. Fiscal space has been used up in the recession. By Q113, the budget deficit will have averaged 5% of GDP for four years running and debt will have risen to 42% of GDP, where it will be in line with the ‘BBB’ median but 1.6x higher than in 2008 and back up to levels last seen in fiscal year 1999/2000 (FY00), when South Africa’s rating was two notches lower. In Fitch’s view, the higher debt level, together with the fact that the wage bill and social transfers consume 52% of the budget, has substantially reduced the fiscal room available to South Africa to counteract any significant economic shocks.
Although they remain better than peer medians, South Africa’s external finances are also deteriorating. In 2010 South Africa became a net external debtor, albeit a small one (1.3% of GDP), from having been a net external creditor during 2004-2009. The increase in external indebtedness reflects the fact that South Africa’s current account has been in deficit since 2004 despite the fact that there has been a commodity price boom for most of this period. The saving ratio is relatively low and foreign direct investment (FDI) has averaged just 1.5% of GDP over this period. The current account deficit (CAD) is set to widen to 4.4% of GDP in 2012 from 4% in 2011 and 2.8% in 2010, following a weakened outlook for exports, so the increase in net debt will continue. However, the CAD is unlikely to reach the 7% of GDP levels recorded in 2007 and 2008 due to a slowdown in consumption.
South Africa’s ‘BBB+’ rating remains underpinned by the strength of its institutions relative to its peers. These include a robust macroeconomic and regulatory framework, an independent and objective judicial system, and able governance. The resulting favourable business climate has enabled the development of a sophisticated corporate and financial sector. The depth and liquidity of the latter has enabled South Africa to borrow mainly in its own currency – 90% of government debt is rand denominated – which is a key rating strength.
South Africa’s macroeconomic framework derives important strength from the credibility of the South African Reserve Bank (SARB), which has successfully managed inflation down over the last decade. Inflation will exceed its target range (3%-6%) in 2012 but in Fitch’s view that owes partly to exogenous factors like food and administered prices and does not diminish the SARB’s inflation fighting credentials. However, inflation is typically higher than in peers as is exchange rate volatility, the latter due to portfolio flows. Despite this, domestic confidence in the currency is high as evident in the low dollarisation of contracts. The sound financial system is also a rating strength.
Political noise has increased in recent months and is set to continue this year. However, Fitch sees the threat of nationalisation – a key focus of debate – as being remote. Although the African National Congress (ANC) has historically favoured a large role for the state, it is unlikely to expropriate assets. However, its entertaining of the nationalisation debate has upset investor confidence. ANC policy towards this issue will only be clarified in the wake of the policy conference in May 2012. Any move to nationalise mines would adversely affect the business climate and have immediate and negative consequences for the rating.
Failure to accelerate growth and make it more labour-intensive on a sustained basis will gradually weaken South Africa’s credit fundamentals and have negative implications for the rating. Conversely creditworthiness would benefit from structural reforms that increase growth and employment prospects. High unemployment already fosters widespread criminal violence and deters foreign investment. Over time it could also threaten social and political stability, damaging the investment climate further.
Further increases in spending, especially the wage bill or social transfers, will limit South Africa’s already diminished fiscal space. It will also push up debt and the interest bill to levels beyond those commensurate with its current rating.
From the Economist. January 21, 2012: Education in South Africa: Still Dysfunctional
FORTE HIGH SCHOOL in Soweto, the sprawling black township outside Johannesburg, was once one of South Africa’s notoriously ill-equipped and poorly performing schools. Five years ago it had no running water, no functioning library, no computers and no sports ground. Designed for 800 pupils, it had to cater for 1,300. Only half those who reached the final year matriculated, gaining the most basic certificate for finishing school. But thanks to philanthropists “adopting” it, Forte has turned itself around. Last year it achieved an 80% pass rate, and half of its matric candidates qualified for university.
Among them was Albert Dove, a black student living with his unemployed, disabled father and poor enough to qualify for free school lunches. He got six distinctions in his exams, including 100% in physical science. Every weekend and throughout the holidays he attended extra maths and science classes at a centre in Soweto run by an international charity.
Low school standards and university fees that are too high for the poor majority help explain why South Africa, the continent’s biggest and most advanced economy, has so low a rate of university attendance. Only one in six gets that far, a much lower proportion than in other middle-income countries. A third drop out within a year. With a few notable exceptions, university standards in South Africa are pretty low. Employers often complain that universities are churning out graduates who are largely unemployable.
Three million South Africans aged 18-24, more than half the total, are outside education, training or employment. Seven in ten have no qualifications at all. Even among those with matric, only 17% are likely to get a job within a year of leaving school, according to Adcorp, a recruitment agency. After five years, 60% will still be jobless. Officially, 25% of South Africans are unemployed; the real figure is probably nearer 40%. Yet there are more than 800,000 vacancies crying out for suitable applicants in the private sector alone, even as 600,000 university graduates sit twiddling their thumbs at home.
The government claims things are improving since last year’s pass rate went up. But the proportion who pass has fluctuated wildly over the years, and often depends on how many of the weaker pupils are prevented from sitting the exam. Besides, the pass mark for many matric subjects is a mere 30%.
Teachers in black state schools work an average of 3.5 hours a day, compared with 6.5 hours in the former white state schools known as “Model C”. A fifth of teachers are absent on Fridays, rising to a third at the end of the month. The education minister herself admits that 80% of schools are still “dysfunctional”.
Reformers have plenty of reasons to be hopeful, among them the growing sophistication of opposition groups. These used to be a mess—divided, undemocratic and starved of resources. One observer called them “the skunks at the democratic zoo”. Many are still hopeless, but some have learnt that discipline can put them within striking distance of power. Zambia and Senegal are recent examples.
Opposition parties also benefit from the general absence of ideological fault-lines in African politics since the demise of Marxism. More than in the West, voters there are swayed by evidence of individual competence, not party affiliation. This is useful for hungry opposition members competing with complacent governments. Africa’s high birth rates produce a pool of young voters who are more likely to take a chance on political newcomers. In many countries a president or party can win office even where all the supporters are under 30, so long as polls are fair.
At the same time, impressively high economic growth rates in many African countries have fuelled a communications explosion. Political campaigns need no longer depend on government-owned media or the ability to travel to far-flung places. They can reach voters directly and remotely via the internet and, especially, the ubiquitous mobile telephone. They can expose political skulduggery and also tabulate poll results instantaneously, making fraud easier to detect. In Nigeria’s 2011 election, tens of thousands of monitors recorded local results and fed them by text message into a central system run by volunteers. Devious governments have to invent ever more complicated and hence less effective ways of manipulating results.
The lack of voter data is a costly obstacle everywhere. Most Africans have no identity documents, so electoral rolls often need to be drafted from scratch for every poll. In Congo the government spent more than $500m on elections last year, making them the world’s most costly after America’s. High rates of illiteracy and a lack of capable institutions do not help. In Sierra Leone’s border regions, officials judge who should get a voting card by listening to people’s accents.
But setting aside the quality of African democracy, all but a few of the continent’s 1 billion people now expect to vote in regular national polls. That is something which 1.5 billion Asians, for all their impressive economic performance, cannot do.
