South Africa may have lost the title of Africa’s largest economy to Nigeria back in 2014, but it remains by far the continent’s most modern, investment-grade economy and the centre of the region’s deepest and most liquid capital markets. It is also home to some of the world’s most significant corporate innovators, from SABMiller to Richemont, Investec and Steinhoff.
However, these global business success stories simply underline the fact that, within the same country, you have both first-world excellence and third-world despair and decay. The country’s 7 million unemployed account for 35% of the work force; 15 million people—nearly one-third of the population—live on less than $2 a day.
On the political and policy front there are a raft of uncertainties, from labour instability to faltering electricity supply, wholesale mine closures, and anti-investment, statist policies. These factors, along with deep and widening corruption and a president mired in his own ethical challenges, have all contributed to very low economic growth.
South Africa’s domestic problems have been exacerbated by the economic slowdown in China, the country’s biggest single export market; a subdued Eurozone, its largest collective trading partner; and a reversal of favour for emerging markets as more normalised economic conditions return in the developed world. The currency has plunged 17.4% against the U.S. dollar in the past two years, and around 65% of South Africa’s exports are commodities or beneficiated commodities, at a time when the prices of natural resources are dropping.
The result of all these factors is that the consensus estimate for South Africa’s growth over the next five years has fallen from 3.5%-4% in 2013 to a paltry 1.5%-2% in 2015.
However, the country has an innate resilience and lesser-known strengths which offer a more positive picture.
In the latest Global Competitiveness Survey (30 September 2015), compiled by the World Economic Forum, South Africa shrugged off state dysfunction and climbed seven places to rank a respectable 49th out of 140 countries surveyed. The big boost here, after years of slippage, was an uptake in information and communication technology, almost entirely in the impressive and innovative private sector.
Regulation of security exchanges and reporting standards are rated the best in the world, and South Africa’s financial services and the soundness of its banking system rank in the top six globally. The country’s constitution and rule of law are somewhat battered but still intact; the judiciary and some of the watchdog bodies still both bark and bite.
Significantly, South Africa also has a far healthier debt position than many of its comparators: its private sector balance sheet is healthy. As Investec economist Nazmeera Moola said in an October 2015 Sunday Times editorial: “While corporates in Brazil and China have borrowed heavily in hard currency, this is not an issue that South Africa faces. The government has also not borrowed much in hard currency. The Rand’s depreciation in the past two years has not markedly affected the country’s debt sustainability.”
These positive forces do not counsel complacency: South Africa today is far removed from the “most favoured nation” status it enjoyed during the Mandela presidency. It urgently requires renewal and reform in key economic areas as well as stronger political competition. However, the country remains incontestably the most democratic, sophisticated and liquid market economy in Africa. That is why it is important, for both Africa and the world, for the country to tackle its considerable problems.
Like South Africa, Nigeria has been hurt by falling commodity prices, particularly in oil, and by a weak currency. However, very different factors are shaping the country’s political and economic landscape.
The big event of 2015, for the entire continent of Africa as well as Nigeria, came in April when General Muhammadu Buhari defeated Nigeria’s incumbent president Goodluck Jonathan. As the Financial Times (5 April 2015) noted: “For the first time in Nigeria’s history an incumbent president has been unseated by the electorate. . . . For the first time also, a sitting Nigerian president accepted with humility that he was obliged to go.”
Buhari has a mountain of challenges to climb, not least the terrorist threat from Boko Haram, and has been slow in ascending the summit. It was only in October—six months after his inauguration—that Buhari named his cabinet. Similarly, Buhari’s electoral promise of an anticorruption campaign has been a slow starter, with political scores being settled as opposed to a fair and comprehensive program being carried out. His countrymen have assigned him the nickname “Baba go slow” which hopefully he will, by deed and action, soon shrug off.
Giving reassurance to international investors is one of the main tasks Buhari faces. In September, Nigeria was expelled from JP Morgan’s influential index of emerging market government bonds because of the tough currency controls the country has imposed to halt the slide in the value of the Naira. This has made it difficult for foreign investors to sell bonds or shares, a problem exacerbated by Buhari’s failure to provide information on how his government will effectively diversify the economy away from oil. Likewise, previously profitable Nigerian banks are facing a liquidity crisis after a new directive forced government departments to transfer their funds into a single government account at the central bank.
Much like Africa’s other oil-producing countries, including Angola, Ghana, and Gabon, Nigeria did not use the boom years to build adequate savings or deepen structural reforms, nor to pivot to economic diversification such as a focus on manufacturing.
Renewed violent disturbances are also possible in the oil-producing Niger Delta as Buhari’s government looks to scale down the costly amnesty payments to former militants at the end of the year. Not only does Buhari have little support in the delta, but he has not yet demonstrated any willingness to engage in the region’s complex politics.
Despite all these issues there is still a sense of optimism, especially within commercial circles in Lagos, that following years of sustained corruption and mismanagement, Buhari’s government is in a position to create a strong platform for growth and economic diversification in Nigeria.
Tony Leon is senior advisor to K2 Intelligence and was former leader of the Democratic Alliance in South Africa.