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South Africa’s economy facing big challenges

South Africa’s economy facing big challenges article image

South Africa’s economy is under increasing pressure following crises in agriculture and mining and renewed fears of an investment downgrade.

Since peaking in 2011, South Africa’s growth performance has been in constant decline.

Despite a slight recovery this year, the growth rate remains low.

Coface, a global leader in credit insurance and risk management, foreecasts the country’s GDP rate will only slightly edge up next year, by 0.8%.

Private consumption, which accounts for approximately 60% of national GDP, is likely to remain sluggish in 2017, says Coface. This is mainly due to subdued overall purchasing power, which is expected to continue.

As the South African Government struggles to reduce expenditure, spending is expected to rise in terms of GDP. State-owned enterprises are the thorn in the side for expenditure reduction programs, especially in the current scenario of low growth.

Investors remain concerned by the country’s rising political tensions, especially with the contested legitimacy of President Jacob Zuma. This environment is contributing to the likely risk of a sovereign downgrade and is depressing investor enthusiasm.

Nevertheless, it should be recognised that South Africa is still is one of the region’s leading industrial nations – particularly in terms of manufacturing. Despite weak conditions in domestic and global markets (along with the negative impacts of volatile exchange rates), manufacturing remains a core sector, along with automotive, chemicals, ICT & electronics and textiles & clothing.

Major risk concerns

The agrofood and automotive sectors represent the two major risk concerns, says Coface.

The agrofood sector is one of the most sophisticated in the Sub-Saharan region and the Government has made it a top-priority in its New Growth Path.

The sector is one of South Africa’s largest manufacturing segments, providing employment for around 30% of the working population.

The country’s well-established food-market ensures a certain stability in terms of demand.

Nevertheless, South Africa’s agrofood sector suffers from a number of challenges – leading Coface to rate the segment as very high risk. The main issues are the deteriorating macroeconomic outlook and uncertainties surrounding economic policies, which are increasingly damaging consumer and business confidence.

Reduced investments

Other ongoing concerns for the agrofood segment include the likelihood of reduced investments, the unsatisfactory state of rural infrastructures and the weakening of local currency against the US dollar.

The automotive sector could also see increasing risks on the horizon. While it benefits from robust exports, a good geographical position and the strong presence of multinational producers within the national market – South Africa’s automotive segment is faced with a deteriorating economic outlook, high inflation and rising interest rates. These factors are negatively impacting purchasing power and dragging down domestic sales. 

New vehicle sales could also suffer from fears over the stability of the labour market and the constant threat of strikes. 

The weakening of the rand could also put pressure on production costs, which car makers may progressively transfer into their final prices.

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