Don't Blame Us, Blame the Financial Crisis

In last night's state of the union address, President Zuma explained that the depreciation of the Rand was not due South Africa's economic policies, but rather "global economic problems". Blaming SA's economic malaise on global factors was a constant theme throughout 2013. In our meetings with government representatives and managers of state owned enterprises over the course of 2013, the consistent message was that South Africa was victim of the global environment. Rather than confronting the problem of SA's declining competitiveness and taking steps to improve infrastructure efficiency and cost,  SA's politicians have sought to place the blame solely on the troubled global economy. As one would have expected the results of this approach have been poor.

Whilst the weakness of the global economy has obviously been a headwind and EM currencies have depreciated over the course of 2013, the argument that SA's poor economic performance is all down to to global factors does not hold due to the fact that :

1) The Rand has been the weakest performer in the EM universe (Chart 1 from Bloomberg)
2) SA industry has lost significant market share due to declining competitiveness (Chart 2 from Macquarie)

South Africa's weakening fundamentals and poor policy are reflected in the fact that the Rand has been among the weakest performers since the beginning of 2013. Countries which have been proactive in addressing economic imbalances and competitiveness have seen far less currency weakness than SA's 22% depreciation.

Chart 2 shows the decline in South Africa's global market share of services exports. While fellow emerging market countries such as China, India, Russia and Brazil have increased their market share significantly over the last 10 years, South Africa's share has been in continuous decline. A similar picture emerges in the traded goods sector, where the competitiveness  of the mining industry has been impacted by the dysfunctional relationship between labor and business.

Despite government assertions to the contrary, politics has played a significant part in South Africa's economic downturn. The inefficient roll out of infrastructure has resulted in a rapid increase in costs born by business, while government has stood by as labor relations in the mining industry have collapsed. Government's unwillingness to confront the declining competitiveness of the economy means that we are unlikely to see a structural recovery, and the target of 5% GDP growth will not be achieved.