Impact of the global economic crisis on the South African economy Seeraj Mohamed UNRISD Conference -3 Nov. Corporate Strategy and Industrial Development Research Programme School of Economic and Business Sciences University of the Witwatersrand
Introduction Stated goal of the post-apartheid gvt was to reduce poverty, inequality & unemployment The post-apartheid developmental project would require economic policies that : addressed the legacy of apartheid Steered economy onto a new development path reduced dependence on resource sectors through industrial deepening and diversification Current government says reducing unemployment & decent work main goal of economic policy
Introduction However, the new democratic government adopted neo-liberal economic policies: Did not implement industrial policies to address industrial structural weaknesses and declining industrial employment Implemented procyclical macro policies that limited social & infrastructure investment Liberalised finance and financial flows, which increased speculation, bubbles & macro volatility Supported the financialisation of the economy
Serious problems existed before crisis The South African economy had an unemployment crisis and poor industrial performance before the crisis. These economic problems are a legacy of past economic and industrial development They are related to the industrial structural weaknesses of the economy. These problems have been exacerbated by recent debt-driven and consumption led economic growth and have intensified as a result of the global financial crisis. Uncertainty of capital flows to developing countries during the crisis increases the fragility of the financial sector because of large trade deficit.
Introduction The worst impact of the crisis is associated with: Structural industrial weaknesses result of development centered around mining and mineral sectors Continued reliance on mining & minerals exports Recent growth can be compared to US debt-driven, consumption led growth and increased investment in services sectors, such as finance and retail Speculative asset bubbles in real estate and finance & increased construction and car sales Central to continued weaknesses is the role of the financial sector which has emulated the behaviour of US financial institutions in increasing leverage and misallocation of capital in SA economy.
Corporate restructuring in s Massive global levels of M&As and global corporate restructuring, which increased global concentration from mid-s SA large corporations restructured Impact of democratic change & capital flight Impact of shareholder value movement & the global corp. restructuring Many of largest corporations restructured, focused on core business, listed abroad & increased international operations Dependence on mining & minerals grew Restructuring negative for industrial diversity
Source: Ernst & Young
6 7 8 % 8% 6% 4% % % -% -4% -6% -8% Net Capital flows (percentage of GDP) 4 5 6 7 8 3 4 5 Net FDI NetPortfolio Net Other 3
Credit extension to Private sector increased about % from -8 BUT Private business investment increased by only 5% % % 8% 7% 6% 5% 4% 3% % % % Credit extension and investment as percentages of GDP 3 4 5 6 7 8 3 4 5 6 7 8 Total fixed capital formation Private business enterprises Fixed capital formation Total domestic credit extension percentage of GDP Total credit extended to domestic private sector as percentage of GDP
Growth in household consumption Components of GDP (real prices, Rmillions), Source SARB 8 6 4 7 7 74 76 78 8 8 84 86 88 4 6 8 4 6 - Household consumption Gross capital formation (Investment) Government consumption Exports less imports
4 8 6 4 - Capital flows to fixed investment (after depreciation) Net capital formation by sector R millions Foreign sector Other monetary institutions Public Investment Corporation Insurers and retirement funds Other financial institutions General government Corporate business enterprises Households 3 5 7 3 5 7
45 4 35 3 5 5 5-5 Capital flows to financial assets Net acquisition of financial assets by sector R millions Foreign sector Other monetary institutions Public Investment Corporation Insurers and retirement funds Other financial institutions General government Corporate business enterprises Households 3 5 7 3 5 7
35 Sources and uses of capital in coporate business enterprises 3 Net savings 5 Gross capital formation 5 5 Net acquisition of financial assets Net capital formation (gross capital formation deprecaiation) 5 3 4 5 6 7 8 3 4 5 6 7
Increased use of derivatives: increase 5 45 4 35 3 5 5 5 financial systemic risks in SA Derivative market - futures contracts : Underlying value (in R billions, current prices) 3 4 5 6 7 8 3 4 5 6 7
Allocation of capital by private sector: - mostly for credit cards, car finance &mortgages; - mostly for short-term and collaterised debt % Private Sector Credit Extension by all Monetary Institutions % r to c8% e s te 7% a riv p6% e th to 5% d e d n4% te x e3% it d re % l c ta o% f T o % % Other loans and advances Mortgage advances Leasing finance Installm ent-sale credit Bills discounted 3 4 5 6 7 8 Investments 3 4 5 6 7 8 Other loans and advances Mortgage advances Leasing finance Installm entsale credit Bills discounted Investments
And, even fixed investment is misallocated 6 Top sectors by investment (as a % of total investment) Coke & refined petroleum products, 3% Electricity, gas&steam, 4% Other mining 4% Wholesale & retail trade 7% Motor vehicles, parts & accessories, 3% Business services 4% General government services % 8 Top Sectors by Investment (as a % of the total investment) Electricity, gas and steam % Coal mining Agriculture, forestry 3% and fishing 3% Other mining 8% Wholesale and retail trade % General government services % Business services 4% Communication 8% Finance & insurance % Transport and storage % Finance and insurance 3% Transport & storage 8% Communication %
A g ri c u l t u re, fo re s t ry a n d f is h in g B e v e ra g e s C o a l m in in g B a s ic ir o n a n d s t e e l G o l d a n d u r a n iu m o r e m in in g 5 4 3 - - -3 Change in capital stock from to 6 for all economic sectors (Real prices, Rmillions, Source: Quantec) M o t o r v e h ic le s, p a r ts a n d a c c e s s o r ie s M e d ic a l, d e n t a l a n d v e t e r in a ry s e rv ic e s O t h e r m a n u fa c t u r in g n g m e d ic a l, d e n ta l a n d v e t e rin a ry s e r v ic e s B u ild in g c o n s tr u c t io n C iv il e n g in e e r in g a n d o t h e r c o n s t ru c tio n E le c t ric ity, g a s a n d s t e a m O t h e r c h e m i c a ls a n d m a n -m a d e fib e rs C a t e r in g a n d a c c o m m o d a t io n s e rv ic e s P a p e r a n d p a p e r p r o d u c t s M a c h in e r y a n d e q u ip m e n t W a t e r s u p p ly O t h e r p ro d u c e rs G la s s a n d g la s s p r o d u c t s P r o f e s s io n a l a n d s c ie n tif ic e q u ip m e n t W o o d a n d w o o d p ro d u c ts N o n - m e t a llic m in e ra l s is io n, r a d io a n d c o m m u n ic a t io n e q u i p m e n t L e a t h e r a n d le a th e r p ro d u c ts M e ta l p r o d u c t s e x c l u d in g m a c h in e ry P la s t ic p ro d u c ts T o b a c c o F o o tw e a r R u b b e r p ro d u c t s E le c t ric a l m a c h in e r y a n d a p p a ra t u s F u r n it u r e W e a ri n g a p p a re l B a s ic n o n - fe r ro u s m e t a l s O t h e r t ra n s p o rt e q u i p m e n t C o k e a n d re f in e d p e t ro l e u m p ro d u c ts P r in t in g, p u b lis h in g a n d r e c o rd e d m e d ia T e x t ile s F o o d G e n e r a l g o v e rn m e n t s e rv i c e s F in a n c e a n d in s u ra n c e B u s in e s s s e rv ic e s O t h e r m in in g T ra n s p o r t a n d s t o r a g e C o m m u n i c a t io n W h o l e s a le a n d re t a i l t ra d e B a s ic c h e m ic a ls
5 4 3 - - -3 Change in capital stock from to (Real prices, Rmillions, S Medical, dental and veterinary services Other manufacturing ng medical, dental and veterinary services Building construction Civil engineering and other construction Electricity, gas and steam Other chemicals and man-made fibers Catering and accommodation services Paper and paper products Machinery and equipment Water supply Other producers Glass and glass products Professional and scientific equipment Wood and wood products Non-metallic minerals Basic chemicals Motor vehicles, parts and accessories Communication Wholesale and retail trade Other mining Transport and storage Business services Finance and insurance General government services
Agriculture, forestry and fishing Beverages Coal mining Basic iron and steel Gold and uranium ore mining Textiles Food Printing, publishing and recorded media Coke and refined petroleumproducts Other transport equipment m to 6 for all economic sectors Rmillions, Source: Quantec) Other producers Glass and glass products Professional and scientific equipment Wood and wood products Non-metallic minerals vision, radio and communication equipment Leather and leather products Metal products excluding machinery Plastic products Tobacco Footwear Rubber products Electrical machinery and apparatus Furniture Wearing apparel Basic non-ferrous metals
Services Employment -, 4, 6, 8,,, - 5,,,,5,,,,5, 3,, 3 4 5 6 7 8 3 4 5 6 7 8 Employment in Services Wholesale And Retal Trade Catering and Accommodation Transport and Storage Finance and Insurance Business service Communication (RHS)
Manufacturing Employment 4 35 3 5 5 5 Manufacturing employment -8 A: Food, beverages and tobacco [3-36] A: Textiles, clothing and leather [3-37] A: Wood and paper; publishing and printing [3-36] A3: Petroleum products, chemicals, rubber and plastic [33-338] A4: Other non-metallic mineral products [34-34] A5: Metals, metal products, machinery and equipment [35-35] A6: Electrical machinery and apparatus [36-366] A7: Radio, TV, instruments, watches and clocks [37-376] A8: Transport equipment [38-387] A: Furniture and other manufacturing [3-3] 3 4 5 6 7 8 3 4 5 6 7 8