South Africa’s economic performance since the mid 1990s has been quite strong. The economy coped well with the transition to majority rule; a solid institutional framework was a big contributor. After many decades of sovereign financing stresses, including a debt ‘standstill’ in 1985 and reschedulings in 1989 and 1993, South Africa is now an ‘investment grade’ sovereign borrower (BBB+ from S&P and Fitch and A3 from Moody’s).
However, employment has lagged headline GDP growth, with unemployment around 25%. The high unemployment reflects spatial mismatches between jobs and jobseekers, large barriers to entry in some industries, and poor education delivery (all partly due to apartheid). There is also a growing disconnect between wages and productivity. The IMF estimates that compared to South Africa’s trading partners real unit labour costs in the manufacturing sector were 35% higher in mid-2011 than in 2007-08.
To increase economic participation of non-whites ‘Black economic empowerment’ (BEE) rules are in place. BEE sets goals for companies on ownership, employment and skill development. Meeting BEE criteria is not legally binding, but firms that don’t are disadvantaged in government procurement. The government has also struggled to meet BEE targets. The policy has also been criticised by some as benefiting only a narrow group of already privileged black South Africans, and of fostering cronyism, corruption and hindering the creation of new innovative black-owned businesses.
South Africa’s economy has rebounded from its 2009 GFC-induced slump. But the rebound has lagged other emerging markets and employment growth has been lacklustre. Modest growth of 3% pa is forecast in 2012 and 2013 ― not strong enough to make inroads into unemployment.
The external position (and the currency) is vulnerable to a sharp reversal in sentiment in capital markets. However, low public and external debt levels (mostly dominated in rand), a flexible exchange rate, and a healthy stock of FX reserves, reduce the risk of a crisis.