Gill Marcus: Celebrating what is good about South Africa and its
economy
Address by Ms Gill Marcus, Governor of the South African Reserve Bank, to the FM Top
Companies awards function, Johannesburg, 26 June 2013.
* * *
Ladies and gentlemen,
Thank you for inviting me to address the FM Top Companies awards function. It is an honour
to be part of a tribute to the best companies in our country. It is appropriate that, at a time
when much of the economic news is gloomy, we hold our heads high and celebrate what is
good about our country and our economy. South Africa has a sound economic foundation
and hundreds, if not thousands, of firms and business leaders that are outstanding in any
context. It is a major source of strength that South Africa has a large number of companies
that continue to grow, innovate, employ people and generate revenue and export earnings
for our country.
It is even more impressive that in times of very difficult and uncertain economic conditions,
both globally and locally, many firms are performing so well. You and your firms are a
significant reason why we can proudly say that while our economy faces many challenges, it
is also highly resilient. We are here today to recognise these firms and their achievements.
The economic environment is a difficult one. The world is in its sixth year of crisis: a crisis
that has repeatedly mutated, shifting its epicentre from a sub-prime crisis to systemic
banking crisis; a liquidity, fiscal deficit and sovereign debt crisis. Measures taken to address
each of these elements have had unintended consequences. Austerity measures have
contributed to an unemployment crisis of immense proportions, particularly for the young.
There will probably be at least one or two more forms of the crisis before we can safely say
that recovery is sustainable. And even then, as we can see in the United States where there
are signs of recovery, the measures that are outlined to be taken very cautiously and with
considerable conditionality, such as a tapering off of Quantitative Easing, have also had
unintended consequences.
As we have seen in recent days and weeks, the exchange rates of many emerging market
economies have been impacted negatively by an outflow of capital. This development could
well mark the start of a new mutation of the ongoing global crisis.
If things do not get any worse it will probably still take a number of years before the world is
back to more normal growth and output gaps are fully closed. Even then, there is debate
about whether that new normal would be at a lower rate of growth than in the past. All in all, it
is a very uncertain and difficult decade for individuals, companies and countries.
South Africa's weak first quarter annualised growth rate of 0,9 per cent is, to some extent,
consistent with what we see happening globally and in other emerging markets and these
developments have, in part, contributed towards a weaker rand exchange rate. But domestic
factors have also contributed. These have to do with lost production in the mining sector,
instability caused by violent and often illegal strike action and persistent capacity constraints
in infrastructure, electricity in particular.
The source of this vulnerability is primarily a large current account deficit, a high budget
deficit, rising public debt and relatively low foreign exchange reserves as well as high
household indebtedness and inflation close to the top of the target range - all suggesting
limited room for fiscal or monetary support.
South Africa is actively taking measures to stabilise the labour relations environment led by
President Zuma who, in his budget vote speech, set out concrete steps to diffuse labour
tension and ensure that labour disputes are conducted peacefully and within our legal
framework. President Zuma also focused on the structural reforms that are being
implemented, within the framework of the National Development Plan, to ensure higher and
more inclusive growth going forward.
Currently the financial markets appear to be confused about the monetary policy reaction
function. This is not altogether surprising, as monetary policy is facing an extremely difficult
dilemma. On the one hand, slowing growth with a downside risk, and the widening output
gap should signal the need for further monetary accommodation, given the absence of
significant demand pressures in the economy. These conditions have already resulted in the
Bank being more tolerant of inflation at the upper end of the target range than would normally
have been the case. This is consistent with a flexible inflation targeting framework.
On the other hand, we are seeing increasingly strong upside risks to the inflation outlook,
primarily coming from exchange rate developments. Had these pressures been simply a
result of excess demand pressures, the response would have been relatively
straightforward. But this is not the case.
There are a number of issues that we have to consider in our decision making: to what extent
is the depreciation going to be sustained? Will the currency continue to depreciate, settle at
current levels or has it overshot in which case it will strengthen at some stage? This is critical
in terms of the extent of the pass-through to inflation. We have observed that the
passthrough thus far has been far more muted than has been the case in previous episodes of
currency weakness, possibly also a reflection of the weak state of the economy. We have to
assess whether the pass-through remains as low as it has been, or will we reach a stage
where the margins of importers can no longer be squeezed? Furthermore, if there is a spike
in inflation as a result of the depreciation, is it a one-off increase that will pass through the
numbers by next year, or will it generate a depreciation-inflation spiral? Most importantly, will
inflation expectations remain relatively contained at current levels?
These are not easy issues to determine with confidence, and have been complicated by the
strong market reaction to the suggestion that the US Fed may begin slowing the pace of its
bond-buying programme.
Our core mandate remains price stability, so our primary objective is to keep inflation within
the target range. Currently our forecasts (and those of nearly all private sector analysts)
suggest that inflation is likely to remain at the top of the band or slightly above, and then to
return to within the target range. The downside risks to the growth outlook would suggest that
we should tolerate inflation at these levels.
However, the upside risks to the inflation outlook make further accommodation more difficult,
but do not automatically imply a tightening of the monetary policy stance. This will be highly
dependent on how we see the inflation trajectory unfolding in this very uncertain
environment. In other words, it has become even more data dependent. There is of course
always the danger that we are "behind the curve" and that we leave it too late (and this we
will only know ex post). But at the same time, a sustained breach of the inflation target is not
our central forecast, and the downside risks to growth imply that we would not want to be
unnecessarily pre-emptive. This is the essence of the monetary policy dilemma, and requires
a fine balancing act.
As already mentioned, South Africa's high quality firms are a key source of strength for the
South African economy. South Africa is a vibrant, robust democracy with a sound
Constitution that protects the rights of all citizens. This is essential for long term economic
growth and for the fruits of that growth to be shared more equitably. There are several other
economic foundation-stones which will help us navigate through these difficult times.
South Africa's macroeconomic policies are sound, clear and transparent. Our
macroeconomic institutions enjoy a high degree of credibility and respect, both globally and
locally. Flexible inflation targeting has helped anchor inflation expectations and has provided
the Reserve Bank with some scope to support economic growth.
Allow me to list at least five additional strengths and opportunities for the South African
economy:
• South Africa's emerging middle class is a source of strength, contributing to rising
consumption, the creation of new firms and greater social stability.
• Our proximity to high growth African countries is already having a positive impact on
our exports.
•
Our natural resources, both mineral and natural beauty, provide huge potential for
investment in mining, agriculture, tourism and niche manufacturing sectors.
•
South Africa's financial services sector is a recognised strength, with the country
ranked in the top three in the world in the regulation of securities exchanges,
soundness of our banking sector and access to financial services as part of a
considered policy of financial inclusion.
•
The efficacy of our legal framework and the strength of our auditing and accounting
capacity provide a conducive environment for the private sector to operate in.
I can list many more areas where steady progress is being made. These strengths are a
cause for optimism for our economy and reflect the significant potential for growth,
employment creation and shared economic prosperity for all in our country.
South Africa's infrastructure programme has the potential to crowd in the private sector to
expand investment and employment. Investments in electricity, renewable energy, freight
rail, ports, water, roads and telecommunications will enhance the capacity of the economy,
enabling faster growth as well as improve the efficiency of private firms.
Two examples are worth mentioning here.
First, adequate electricity provision is critical. We know that at present we cannot grow at a
rate much in excess of 3 per cent without hitting against electricity supply constraints. We are
also aware that certain investment projects do not get off the ground because of lack of
certainty of electricity supply. Thus new energy capacity must be brought on stream as soon
as possible, and on-going investment in sustainable energy capacity remains an imperative.
Second, we have invested in a world-class road infrastructure in Gauteng which has already
had a major impact on economic efficiencies. According to an independent study, the overall
average travel time on the N1 north road section between Buccleuch and the Old
Johannesburg highway has been reduced by 50 per cent to 13 minutes. The improved travel
time and travel speeds come despite a 28 per cent increase in traffic volumes since the
implementation of the Gauteng Freeway Improvement Programme. Furthermore, petrol
consumption has also declined as less time is spent idling on the highways, not to mention
improved road safety and reduced vehicle running costs. The need for and benefit of such
economic efficiencies brought about through an expanded infrastructure programme cannot
be overestimated.
Investment in infrastructure is for the benefit of both current and future generations, and
should provide the private sector with a longer term time horizon, encouraging private
investment, which has been very weak over the past few years. We hope that the private
sector will respond appropriately, and public-private partnerships should be promoted in the
process. Growth in gross fixed capital formation is currently led by state owned enterprises,
but for South Africa to reach its growth potential the private sector's role is essential. In
general, the private sector contributes around two thirds of such investment. Gross fixed
capital formation as a ratio to GDP presently stands at 19 per cent, down from a high of
23 per cent in 2008, and compared for instance with that of Indonesia, a fast-growing
emerging market, where it stands at over 30 per cent.
South Africa's infrastructure programme will have benefits for many sectors in the economy.
Going beyond South Africa, Africa's infrastructure investment increased from about
US$10 billion in 2000 to about US$45 billion in 2010, and is set to rise to US$93 billion a
year by 2020. South African construction firms are well placed to be an integral part of these
opportunities in our region.
In the 1960s, Korean construction firms won large contracts to build roads in South East
Asia. These firms sourced their inputs from South Korean manufacturers, providing the first
growth stimulus for them. Similarly, South African construction firms can grow their order
books globally and use a proportion of South Africa material and capital equipment,
stimulating our manufacturing sector.
Long term growth requires a partnership between the public and private sectors, which
requires a much longer horizon. Too often we are caught up in the paralysis of
shorttermism. A long term perspective requires policy certainty, trust in institutions and confidence
in the longer term growth outlook. There is increased recognition within the private sector
that sustainable earnings growth requires such a longer term horizon and the chase for short
term returns is not always consistent with longer term sustainable growth.
At least some of our woes in the mining sector arise from a degree of short termism amongst
all stakeholders in the sector. Before the era of global capital markets, mining companies
were able to adjust to the volatility of commodity prices. When prices were high, they were
able to accumulate cash on their balance sheets. They saved this money for times when
prices would fall. More recently, shareholders penalised companies for keeping large piles of
cash on their balance sheets. This resulted in large dividend payments. In turn, management
took large bonuses when prices were high. Workers too demanded higher salary increases
when commodity prices were high. When prices fell, mining companies made losses and
there was no cushion. It becomes much more difficult for a company to raise capital when
they are making losses. Similarly, management bonuses and workers' salaries are sticky.
The necessity of taking a longer term perspective does not just apply to shareholders and
fixed capital investment. It also applies to human resource management. South African firms
spend a lower proportion of their revenue training their staff than comparable firms in other
countries. For all firms globally, staff development is a win-win investment helping to raise
productivity and make work more meaningful and interesting for individuals. In a country
such as ours where so many were denied adequate education, firms play a crucial role in
training their staff. We need to remember that lack of education, or poor education, is the
greatest exclusion there can be.
In many cases, it is not the absolute salary that workers feel aggrieved about. It is the lack of
a career-path and opportunities to move up the ladder that is the source of frustration. Peter
Drucker, one of the fathers of theories on management, wrote in The New Realities (1989):
"Management's fundamental task is to make people capable of joint performance through
common goals, common values, the right structure, and the training and development they
need to perform and to respond to change".
To bring several strands of my talk together, I refer to two studies, one by the IMF and the
other by the OECD, into how countries can avoid the middle income trap, which is defined as
a period of slower growth or even stagnation when countries reach a GDP per capita of
between US$5,000 and US$10,000 (in PPP terms).
These studies suggest that to break out of this middle income trap, countries need to move
from being adapters of technology to being producers of technology. Countries that move up
the value chain to capture a larger share of the intellectual property or innovation succeed in
breaking the trap.
While South Africa's expenditure on Research and Development (R&D) has increased in the
past decade, the country still lags its peers. R&D expenditure in South Africa amounts to
about 0,9 per cent of GDP, well below the 2,3 per cent average for OECD countries. In most
countries, about two thirds of R&D spending is undertaken by the private sector, but in
almost all cases there are strong institutional links between firms, higher education
institutions and science councils contributing to both higher levels of research spending and
more domestic commercialisation of the ideas and innovations.
South Africa has many innovative firms that are able to compete with the best in the world.
The most successful firms take a long term perspective, invest in their people and take
innovation seriously. Allow me to quote Sipho Nkosi, the CEO of Exxaro: "We spend money
on innovation and research and development because we believe that companies focusing
on this will survive in the future and will have an advantage over those that don't innovate."
The studies referred to also suggest that the presence of local firms that have a global
footprint are critical to this process. Countries that have firms with strong global brands are
more likely to move up the value chain. This is partly because so much of the value addition
in the world economy today rests in research and development, innovation, branding and
marketing, and logistics and distribution.
How relevant is such a strategy for South Africa? On the one hand, South Africa has large
numbers of poorly skilled people either unemployed or employed doing relatively low
productivity jobs. On the other hand, we have sophisticated firms who operate at the cutting
edge of global innovation with highly skilled staff.
South Africa needs to pursue both strategies. We must grow our mining, agriculture,
manufacturing and tourism sectors where we have significant comparative advantage. Parts
of these sectors are also labour intensive and require relatively low skilled workers. Growth in
these sectors has the potential to create millions of jobs.
At the same time, South Africa needs its firms to develop brands and technologies that it can
export. We are already well placed in many respects in telecommunications, banking, retail,
brewing, construction and mining and we have firms with a significant global presence and
strong brands. These firms generate significant export earnings for South Africa through the
provision of knowledge services. For example, in 2011, South Africa exported US$7 billion
worth of mining equipment and had a trade surplus of US$472 million in mining equipment.
Such exports have strong backward linkages to our own manufacturing sector.
By 2050, the world will need to produce about 80 per cent more food than today to satisfy
growing populations and rising food consumption. Africa contains the largest proportion of
underutilised arable land on the planet.
This provides a huge opportunity for investment, not just in agriculture but in
agroprocessing, in water management, in roads and ports and in cold storage facilities. South
African firms in the agricultural and agro-processing sector have the expertise, the knowhow
and the capital to invest in food production and processing on the continent. Again, there are
strong backward linkages between such investments abroad and jobs back home.
Ladies and gentlemen, yes these are difficult economic times. We have strong firms that
significantly contribute to South Africa's economic development. From our perspective at the
Bank, we will endeavour to maintain a sound and predictable macroeconomic framework and
enhance our economic environment. South Africa's progress requires firms and businesses
to become partners in development. Growing firms mean a growing economy and a growing
economy is essential for firms to grow. These are mutually reinforcing developments.
I am inspired by the successes of South African firms domestically, on the African continent
and globally.
We have high calibre business leaders who are smart, professional and innovative. We need
closer ties and partnerships across our economy to raise our growth level and to make our
growth more inclusive. Our appeal to you is to continue with your good work, take a longer
term perspective and invest in people and technology to drive higher and more inclusive
growth and reduce the unacceptably high income differentials. I am confident that through
such partnership, drawing on our many strengths as a nation, South Africa will grow and
continue to prosper.
Again, congratulations to all the winners of the awards.
Thank you.
References
International Monetary Fund (2013). Asia and Pacific. Shifting risks, new foundations for
growth. Regional Economic Outlook, April.
Jankowska, A, A Nagengast and J Ramon Perea (2012). The product space and the
middleincome trap: comparing Asian and Latin American experiences. OECD Development Centre,
Working Paper No.311.