Gill Marcus: Challenges for young professionals in South Africa
Address by Ms Gill Marcus, Governor of the South African Reserve Bank, to the Black
Management Forum Young Professionals, Sandton, 27 September 2013.
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Thank you for the opportunity to address you this evening. As young professionals you are
the future of this country. Some among you may well be the first in your family to have
attained this level of professional education or earning potential. As professionals you are in
a particularly privileged position at a time when the global economy is still trying to recover
from the financial crisis that began in 2007. While millions of people around the world lost
their jobs, and many have lost hope of ever getting a job again, a global skills shortage
exists. This shortage is even more severe in South Africa, and without appropriate skills in
the country, and without a strong and sustained global recovery from the crisis, the domestic
economy will struggle to grow sufficiently to make appreciable inroads into our persistent
unemployment problem.
As has been well documented, the global crisis hit different countries in different ways, and
how countries were affected was determined in part by policy responses as well as by
different structural features.
Whereas the recession in South Africa was relatively brief and shallow, in line with most
emerging market economies, the recovery has lagged that of our peers. Furthermore, we
were an outlier in terms of the number of jobs lost during the crisis, with almost one million
jobs lost. Five years later we are barely back to the levels of employment achieved before
the crisis. The official unemployment rate stands at 25,6 per cent, while youth unemployment
is 52,8 per cent. It is probably true to say that the longer a young person stays unemployed
after leaving school, the lower their chances are of ever getting a job and they get deskilled,
demotivated and disaffected, leading to social hardships and a drain on society. It is also
probably the case that if people over the age of 50 lose their jobs they are unlikely to ever
work again.
Most of you here this evening, as young professionals, are university graduates. You are
among the fortunate ones who have been relatively protected from the fallout of the crisis.
And where skills shortages are more severe, the more protected are graduates as they
command a premium in the labour market. A lot will clearly depend on the type of skills and
qualification, and the quality of that qualification. But globally, there appear to be mixed
experiences regarding the impact of the crisis on graduate employment. There have been a
number of anecdotal reports of the challenges facing graduates in finding employment. This
has certainly been the case in Europe and the UK, with reports of graduates having to take
on temporary and relatively menial jobs. This not only affects their lifetime earnings, but also
causes a ripple effect by depriving less skilled workers of access to these jobs. According to
a recent survey conducted by the Trendence Institute in Berlin, the number of applications
European business school graduates expect to send out before they get their first job has
increased from 28,5 in 2002 to 38; and, on average, European graduates now expect to
spend almost six months looking for a job. But in Greece and Spain, where unemployment is
above 25 per cent and youth unemployment double that, the expectation is ten months.
There are indications that, while the crisis has no doubt had a devastating effect on unskilled
and even semi-skilled workers, South African graduates appear to have fared better than
their European counterparts. Recent research suggests that South African university
graduates are relatively better off, but perhaps not surprisingly so. According to research
conducted by Hendrik van Broekhuizen and Servaas van der Berg at Stellenbosch
University, and published by the Center for Development Enterprise, the stock of South
African university graduates more than doubled to about 1,1 million between 1995 and 2012,
but the broad unemployment rate of graduates has remained below 6 per cent. At the same
time the labour force participation rate for graduates is around 90 per cent, compared with
59 per cent for people with only a school education.
However, these figures hide a racial disparity. While the number of black graduates
employed has trebled over this period, the unemployment rate of black graduates has been
consistently higher than that of whites, although the gap has narrowed significantly over time.
The above-mentioned study shows that in 2012 the unemployment rate of black graduates
was 8,6 per cent, compared with 3,0 per cent for white graduates. This is still a significant
difference, and I am sure we would find this compounded by gender bias if this was to be
analysed.
It is perhaps also worth noting that their research distinguishes between university graduates
and other tertiary education. In the latter category, the experience of graduates has not been
as positive, and may well reflect the state of the economy as well as some quality
constraints. They show a general tendency for unemployment of graduates, irrespective of
race, to follow the business cycle, but worsening economic conditions seem to have less of
an impact on graduate unemployment than on people without degrees.
There is no doubt that education matters for employment prospects. According to the
Quarterly Labour Force Survey, in the second quarter of 2013 the unemployment rate was
5,2 per cent for university graduates; 12,6 per cent for those with other tertiary education;
27,0 per cent for those with matric and 30,3 per cent for those with less than matric.
This relatively favourable trend of graduate employment is consistent with results of the
Professional Provident Society of South Africa (PPS) Professional Confidence Index Survey,
which shows that graduate professionals are relatively confident about the future. The most
recent survey revealed a 70 per cent confidence level when respondents were asked about
the future of their profession over the next five years. However, the results show that
professionals are increasingly concerned about the outlook for the local economy, with only
55 per cent feeling confident. Nevertheless, 77 per cent of respondents were confident about
remaining in the country for the foreseeable future.
Because the outlook for the domestic economy is intricately tied to the global prospects, it is
appropriate to consider whether or not we are out of the crisis yet. There is little doubt that
the global financial crisis is still with us, although it has continued to mutate. While the
general global outlook seems to be a bit more positive, we appear to have moved into a new
phase, which is no less risky or uncertain than previous phases. And even if things don't get
worse, they will take a long time to get better.
How has the crisis mutated? What started off as a banking crisis, spurred by questionable
banking practices in the advanced economies in particular, a failure of regulation in some
jurisdictions and excessive household borrowing, developed into a synchronised global
recession. World trade, commodity prices and asset prices collapsed, and millions of people
around the globe lost their jobs. Fortunately, policy makers in the advanced economies had
learned from the mistakes of their predecessors during the Great Depression of the early
1930s, and a repeat of that era was avoided. So, although things were bad enough, they
could have been much worse.
But the path to recovery has not been easy. Expansionary fiscal policies were soon
constrained as government debt ratios became unsustainable and the crisis mutated into a
sovereign debt crisis, particularly in a number of European economies, which threatened the
existence of the Eurozone as a single currency area. Increasing reliance was placed on
monetary policy and, as interest rates reached their zero lower bound in a number of the
advanced economies, a range of unconventional policies were introduced, including
quantitative easing, which is a process whereby the central bank injects money into the
economy by buying government bonds or other assets. The subsequent combination of high
liquidity and low interest rates led to a global search for yield, and consequently reinforced
strong capital flows into emerging market economies, which had generally recovered from
the recession by late 2009. Emerging markets, led by China, were seen to be the new engine
for global growth, and this development was seen as a tectonic shift in the balance of
economic power around the globe.
However, these capital inflows created challenges for emerging market economies, as the
resulting exchange rate appreciation undermined competitiveness. Some emerging markets
complained about "currency wars" and various policies were implemented to stem these
inflows, with very mixed success. But at the same time, stronger exchange rates did help to
constrain inflationary pressures, allowing monetary policy more freedom to focus on
providing some stimulus to the hesitant growth recovery.
A notable structural change in the nature of these capital flows was the predominance of
flows into domestic currency bond markets in emerging market economies, with
nonresidents holding increasing proportions of domestic bonds. South Africa's experience was
no different. In the pre-crisis period, the bulk of portfolio flows to South Africa were to the
equity market. Since 2009 until recently, bond flows predominated and non-resident
ownership of the outstanding stock of bonds increased from around 12 per cent in 2007 to
around 38 per cent currently. This change in the pattern of flows reinforced the downward
pressure on long term bond yields. Although this did not have the positive effect on private
sector investment that one would generally have expected, it did have a significant effect on
the cost of borrowing by government at a time when the counter-cyclical fiscal policy of
National Treasury was relatively expansionary. These flows also helped to finance the
widening current account of the balance of payments.
So what has changed? We now appear to be entering a new but still highly uncertain phase
of the crisis. Growth in the emerging market economies, including China, has been declining,
and earlier optimism that emerging markets could decouple from the advanced economies
has faded somewhat. At the same time, there are some signs of recovery in the US, which
prompted the US Fed to begin to consider slowing the pace of extraordinary monetary policy
accommodation it has been providing. This does not mean an imminent tightening of policy
by raising short term interest rates, but rather beginning to cut back on the pace of asset
purchases, currently at US$85 billion per month.
The reaction to the announcement by the Fed in May that tapering would begin relatively
soon took many analysts and market participants by surprise, and underlined just how
nervous markets are, and how elevated the uncertainty is. What was meant to be an orderly
adjustment threatened to become precisely the opposite, despite the assurances by the Fed
that tapering would be done in a responsible manner. Long-term bond yields and mortgage
rates in the US increased by about 100 basis points. The spillover effect on emerging
markets was intense, with bond yields generally increasing by more than in the US, as bond
flows reversed sharply - since May about US$20 billion has flowed out of emerging bond
markets, with R17 billion net sales by non-residents in the domestic bond market between
22 May and the end of August; and emerging market currencies, including the rand,
depreciated markedly across the board.
Although there was a general expectation that tapering of quantitative easing would begin in
September, there was a great deal of uncertainty around the pace and timing, and the period
between the May and the September FOMC meeting was highly volatile. In the event, the
Fed refrained from tapering in September, out of concern about the slow pace of recovery in
the US labour market; the unresolved fiscal issues in the US which could lead to further fiscal
contraction when the debt ceiling is reached, possibly in mid-October; and the negative
impact of tight financial conditions and higher long term interest rates on the nascent housing
market recovery in the US.
The reaction of the markets to this surprise was dramatic, with strong recoveries in bond and
equity markets, while the dollar weakened across the board. However, it is inevitable that the
Fed will have to begin tapering at some stage, and markets are likely to react or over-react to
any data coming out of the US that is likely to have a bearing on US monetary policy
decisions. We have been given a taste of what is to come, and we are in for a difficult and
volatile period ahead. This is unchartered territory, and whatever the US does is going to
have spillover effects onto the rest of the world. This is why we pay such close attention to
developments in the US, including who will replace Ben Bernanke when his term expires at
the end of January 2014.
While the news from the US appears relatively positive, the same cannot be said about the
prospects for the Eurozone, where the outlook for growth is poor, despite the fact that the
region as a whole emerged from recession in the second quarter of this year. A number of
European countries are still experiencing negative growth and, even where growth is
positive, it remains very weak. The July World Economic Outlook (WEO) update of the IMF
forecasts growth of -0,6 per cent in 2013 and 0,9 per cent in 2014, with the risks still seen to
be on the downside. One of the constraints facing these countries is the weak state of their
banking sectors, which have not recovered sufficiently to resume lending on a large scale,
and there is still very slow progress towards a banking union in the region. At the same time,
fiscal consolidation continues to be quite severe in some countries and the debt ratios are
still deteriorating in the peripheral countries, for example, the debt to GDP ratio in Greece
now stands at around 160 per cent, and that of Italy at around 130 per cent.
From a South African perspective, given our trade and investment links, this is not good
news, and implies that the crisis will be with us for some time. Europe is still our major
trading partner, despite accounting for a declining share of our manufacturing exports, from
around 38 per cent to 25 per cent between 2007 and 2012. The importance of Europe to
South Africa is further underlined by its weight as a source of foreign investment into South
Africa. According to the Census of Foreign Transaction, Liabilities and Assets, published by
the South African Reserve Bank earlier this month, European countries and the UK are the
main sources of foreign capital to the South African economy, with the relative share
unchanged at around two-thirds since 2001. However, the share of the UK has declined from
45,5 per cent in 2001 to 37,6 per cent in 2011.
The recent July WEO downgraded its global growth forecasts for emerging markets, and
unfortunately the BRICS countries featured strongly in this downgrade. The 2013 growth
forecast for China was reduced from 7,8 per cent to 7,5 per cent; Russia from 3,4 per cent to
2,5 per cent; and Brazil from 3,0 per cent to 2,5 per cent. Although China is not an important
destination for our manufacturing exports, it remains our main trading partner, mainly as a
destination for our commodities. China also has an important impact on global commodity
price trends, and the recent weakness in a number of commodity prices has been ascribed to
the slowdown in that country.
While the crisis has curtailed domestic growth, it is not the only contributory factor. After all,
our emerging market peers have faced the same challenging environment and yet
outperformed South Africa in the post-crisis period. The World Economic Forum (WEF)
Global Competitiveness report paints a mixed picture of how South Africa stands up to
international comparison. It shows that, with respect to the financial sector, we are up there
with the best. South Africa was ranked first out of 148 countries for regulation of securities
exchanges; first for strength of auditing and reporting standards; first for efficacy of corporate
boards and the protection of minority shareholders' interests; second for financing through
local equity markets; and third for overall financial market development. This reflects well on
the sector, and also on the quality of the professionals that make up that sector, including
accountants, economists, etc. Many of you here this evening are part of that sector. What is
important to bear in mind is that, while there is recognition of the excellence of South Africa's
financial sector, and it is a critically important asset for the country and our future
development, it must serve the needs of the real economy.
South Africa cannot simply aspire to be a world leader in the financial sector. We need to
encourage more productive real sector investment and employment and, crucially,
encourage exports, given our dependence on imports of capital goods. Unfortunately,
according to the WEF, we are have slipped in the overall competitiveness ranking from 40th
to 53rd, and we have been surpassed by Mauritius as the most competitive country in Africa.
For years we have been somewhat complacent about being the biggest economy in Africa.
With the current growth rates, we could be overtaken by Nigeria within a decade. We fare
even worse when it comes to labour relations where we are ranked worst in the survey of
148 countries.
This declining competitiveness is reflected in South Africa's widening current account deficit
at 6,5 per cent of GDP in the second quarter of this year, driven to an important degree by a
weak export performance, which can only be partly explained by weak demand growth. Our
exports have also suffered due to widespread strikes: not only do current export volumes
decline, whether commodities or manufactured goods such as motor vehicles, but South
Africa's attractiveness as an investment destination suffers, and this has the potential to
undermine future investment in the economy. South Africa is part of the global manufacturing
supply chain, and reliability of supply is key to maintaining and improving our position in this
chain. South Africa's competitiveness is further undermined by unit labour costs rising
relative to competitor countries, and a weaker exchange rate only helps improve
competitiveness if not offset by wage and price increases.
In order to improve our growth prospects we need a sustained increase in fixed capital
formation. Having reached a peak of around 24 per cent of GDP in 2008, the ratio of gross
fixed capital formation to GDP has now declined to around 19 per cent. This is well short of
the 25 per cent ratio that is generally seen to be the minimum to sustain the growth rates that
we require to make inroads on unemployment, and even further away from the 30 per cent
aspired to in the National Development Plan. The decline in the investment ratio has been
mainly a result of a collapse in investment expenditure by the private sector which, at the
height of the crisis, was faced with relatively low levels of capacity utilisation and uncertainty
about the future. Growth in gross fixed capital formation remains weak, at 2,7 per cent in the
second quarter of 2013.
Since the crisis, infrastructure expenditure by the state-owned enterprises has been the main
driver of fixed investment. The emphasis on infrastructure investment is appropriate as it is
likely to contribute to improved economic efficiencies and helps with the alleviation of existing
bottlenecks in the economy. But the focus on infrastructure is not new, and the plans must
come to fruition.
But it is not only the government and state-owned enterprises that need to invest. In his book
"The Next Convergence" Michael Spence, the respected growth theorist, has shown that
countries which have sustained growth rates of around 7 per cent or more for 25 years
generally have government and public sector investment ratios of between 5 and 7 per cent
of GDP, and total investment rates of at least 25 per cent of GDP. A consistent growth rate of
7 per cent will allow for a doubling of income every 10 years, whereas a growth rate of 3 per
cent will take 24 years to double incomes. Currently our problem is that private sector
investment is weak, which may partly reflect excess capacity in some sectors, but also a lack
of general business confidence. There are indications that private sector fixed capital
formation has begun to improve, but this appears to be gradual and tentative. In the second
quarter of 2013, growth of 4,4 per cent was recorded.
Michael Spence sums it up appropriately as follows: "Put bluntly, growth requires investment,
and that means present sacrifice for future gain. The job of leaders is in part to get everyone
on board, to build a consensus behind a forward-looking vision, underpinned by a growth and
development strategy that is credible. Multiple classes of participants and organised
stakeholders need to be willing participants. These include labour, unions, businesses and
entrepreneurs, civil society organisations, and households at various levels in the income
distribution." Unfortunately, while there is a common view that we need investment, there is
no consensus around how this should be achieved, and how the sacrifices should be shared.
This brings us back to where I began this evening, and that is the need for education or
investment in human capital. I have on numerous occasions in the past stressed the need to
improve the quality of education in South Africa and to fix the parlous state of many of our
dysfunctional schools. We need to value education and, thereby, knowledge, and not simply
the certificate of qualification. But we also need to ensure that the education we do receive is
of value. The CDE report referred to earlier suggests that, while not perfect, the university
system is turning out appropriate and good quality skills. But we also need to focus on other
technical skills that are not taught in universities but are no less important to the economy.
Not only does an undertrained and undereducated workforce constrain economic growth, it
reinforces the cycle of unemployment and widening inequalities. As Michael Spence has
noted, in a world in which knowledge and connectivity are increasingly the basis for value
creation, failures in the educational system are the surest form of exclusion there is.
In conclusion, the crisis is still with us, and South Africa faces a challenging future. However,
the doom and gloom associated with the emerging markets is probably overstated: whereas
there will be global adjustments in response to normalisation of monetary policy in the
advanced economies, and this means volatility in emerging market financial markets, it is
hard to see a recovery of global demand or demand from the advanced economies as being
anything but good news in the medium to long term. This is what we have been waiting for.
But we have to ensure that we are well-positioned to take advantage of the global recovery
and minimise the impact of the uncertainty and volatility that will surely accompany such a
recovery.
And as professionals, all of you here this evening have an important role to play.
With your personal achievements comes responsibility - to your immediate families, to those
who have supported you throughout your studies, to your communities and to society as a
whole. You have dreams, ambitions, and visions of the future South Africa we are all striving
to build. So where is your voice, your passion, your purpose in the vibrant debate that rages
as we work to build our common future? We all have the ability to exercise both reason and
choice. The future will be what you make it.
I wish you all well in your personal and professional lives.