MACROECONOMIC ANALYSIS OF SOUTH AFRICA

SUBMITTED TO: DR. SANGITA KAMDAR

GROUP 10

Ashish Cherian(C007), Charulata Gautam (C050), Jeet Dutta(C011), Shubham Narula(C014),

Tejas Pandya(C023)
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Introduction
South Africa remains one of the most interesting economies that could be studied, due to the
fluctuating business cycles that the country’s economy has gone through. Right from the 1990s
till 2011, the economy of the country flourished post the apartheid period, tripling its GDP to
400 billion USD, while having a rise in other economic factors, right from income, demand,
investments, and more. However, post the great recession of 2008, the country has been
growing at a sub-standard pace, lower than the global average, and much lower than many
other developed nations.

South Africa's economy has seen major increases in growth rates in sectors such as mining,
manufacturing, and utility services like electricity, gas, and water. These sectors have seen the
highest increase in growth rates in 2017 - 2018. For example, the agriculture sector growth
tripled in 2017, while the mining sector grew by 23.2% and manufacturing grew by 6.7%.
Other sectors like the construction sector, trade, catering and accommodation sectors,
transportation, finance, real estate, personal services, and others have seen stagnated growth
for the past decade, without major growth. This could be due to a mature market, which is
similar to a ‘cash cow’ for a firm, or because South Africa is diverging away from where the
global economy is headed towards.
Many experts claim that while the global growth is accelerating, without considering the
COVID-19 pandemic, which has had a cascading effect across the world, the South African
economy was stagnating. While other developing and developed economies were having
momentum across secondary and tertiary sectors, South Africa was more or less dependent on
commodities and in particular, their rich source of ‘raw materials’ which were not
internationally sought after anymore. South Africa, since 2011 had been weakly integrated with
the global growth chain. The country saw a period of growth in 2017 and 2018, which again
contracted in 2019, and staggered even further in 2020.

The reasons for the economic slowdown could have been due to a variety of reasons such as
loss of investor confidence, high-interest rates, manufacturing orders slowing down,
deregulation, poor management, wage-price controls, a stock market crash, sudden ‘act of god’
situations like COVID-19, credit crunches, poor monetary or financial policies, deflation,
stagflation and more. Recently, the World Bank pegged the contractions in the South African
economy at over 32.6%, which was practically the lowest since the post-apartheid period (1990
onwards). Hence all the reasons need to be studied and analyzed accordingly, by taking into
account different aspects like short and long term aggregate supply and demand, the areas
around inflation, unemployment, and the different business cycles in the past few years,
different multiplier models and their effect on the South African economy, the effectiveness of
the monetary policies set by the South African Reserve Bank (SARB), the effect of taxes,
budget deficits, fiscal policy and trade on the South African economy.

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Objective
The objective of the following report is to understand and analyze:
(i) The short-term and long-term aggregate supply and demand and the factors
affecting them
(ii) Various macroeconomic factors like inflation, unemployment, business cycles, and
trade
(iii) Different Multiplier models and their effects on GDP
(iv) Effectiveness of Monetary Policy on the economy
(v) Effects of taxes, budget deficits and Fiscal Policy on the economy

Analysis of Macroeconomic Scenarios

When concerning macroeconomic scenarios that have affected the South African economy and
the subsequent policies, there could be many of them such as inflation, deflation, stagflation,
unemployment, negative or positive net exports, contractions or sub-par growth rates, or higher
than average rates. Each of these scenarios is taken independently and analyzed below.

Unemployment
Pre-Analysis Understanding: The major sectors, which South Africa employs itself are the
mining and manufacturing sectors. The country consists of a majority of the reserves of gold,
platinum, and other minerals. When it concerns manufacturing, South Africa is a world leader
in segments like railway rolling stock, synthetic fuels, mining equipment, and machinery. The
industrial sector employs nearly a quarter of the entire workforce and contributes over 26% to
the GDP.

However, the major industry which employs young South Africans is the services sector which
employs 72.3% workforce and also represents 61.2% of the GDP. Within this sector, the most
popular sub-sectors which attract the labor population are finance, real estate, and government
services. Apart from these sectors, there are the tourism and agricultural sectors, each of which
have grown considerably, but attract a minute part of the entire workforce.

The Unemployment Rate in South Africa is a staggering 28.18%, as of July 2020

Unemployment Rate in South

Africa ( 2010 - 2020 )
30.00% 26.92%
24.69% 24.90%
25.00% 28.18%
26.55%
24.73%
20.00%
2010 2012 2014 2016 2018 2020

Unemployment Rate

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Analysis: In the late 2000s, unemployment in South Africa declined. However, post the great
recession of 2008, a large number of youths, primarily in the age bracket of 18 to 24, are out
of work or have never been employed. The unemployment rate for this age bracket stands at
48%. The rate of unemployment for this group is also twice the unemployment rate for people
in the age group of 25 to 60.

In South Africa, there exist different kinds of unemployment – seasonal unemployment,

frictional unemployment, and cyclical unemployment. For example, farmworkers in vineyards
in South Africa are in demand during the harvesting period and unemployed during the off-
season. Cyclical unemployment has also been an issue which the South African government
has found tough to bring down, as inconsistent growth in the economy and decrease in
aggregate demand and subsequent GDP since 2011, has caused more people to become
unemployed.

The most common type of unemployment in SA is Frictional Unemployment

This happens since the unemployed labor force is unable to meet the demands of South Africa’s
industrialized sector which requires medium to high skilled labor. Also, the lack of
communication facilities, such as proper internet facilities in the rural areas of South Africa
prevents and discourages them from being a part of the participative labor workforce.

The reasoning behind Unemployment Rates

(i) Lack of secondary or tertiary education among South African youth
(ii) Low participation in the labor workforce
(iii) Poverty and rise in Discrimination against certain races

Inflation
Over the past two decades, the South African Reserve Bank (SARB) has been trying to bring
about an inflation-targeting framework, to keep a stable economy running. However, over the
past decade, the inflation rate has been present between 3 to 6%, mostly around 5.2% (average),
which is much more than the average global inflation rate.

Reasons?
South Africa, has over the past few years experienced cost-push inflation, as the costs of many
input products in the manufacturing section have risen. Even crops and livestock are less
available due to the drought, yet demand has remained the same. However, the SARB has
increased interest rates, in an attempt to curb the inflation rate, yet has faltered.

Increase in Inflation Rates are only mainly useful in curbing Demand Pull Inflation

Note: The chart below shows the inflation rates, structured by the SARB since 2010. However,
as of 2020, South Africa was seeing inflation rates at around 3.7%, which was the lowest in the
decade.

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 Inflation Rates in South Africa
7.00
6.59
6.00 6.14
5.78
Inflation Rates
5.00 5.02 5.72 5.18 4.50
4.51
4.00 4.06
4.12
3.00
2.00
1.00
0.00
2010 2012 2014 2016 2018

Major Contributors to the over-average Inflation Rate:

Some of the major contributors to the rise in the inflation rate have been food, housing,
transportation services, and other goods and services.
Reasoning: In South Africa, there is a general belief in the housing industry where the rent
goes up by 10% annually. At the same time, if it concerning premium price rises in the
insurance sector, there is a lack of competitors. This leads to no price control and, without any
possibility to create a price ceiling. Greater competition between the different players would
force prices to a certain level. However, there are several regulations in these industries which
discourage competitiveness in the market. This is turn has affected investments and has
curtailed economic growth.

NOTE:
(i) Despite being the second-largest economy in Africa and the 39th largest in the world,
the country is ranked 139th when it comes to the ease of starting a business. This is due
to several regulations set by the government, which prevent competitiveness in the
private space.

Trade
Pre-Analysis Understanding: In 2018, South Africa had net exports of $19.5 billion (Exports
= $115 billion, Imports = $95.5 billion) and ranked 36th in the world, in terms of exports. The
top exports of South Africa were platinum, gold, iron ore, cars, and citrus, while the top imports
were crude petroleum, general commodities, refined petroleum, telephones, and cars. Most of
the countries which South Africa exported to were China, the USA, Germany, and Japan, while
the countries which it imported from were China, Germany, the USA, India, and Saudi Arabia.

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Analysis: What’s gone right and what’s gone wrong?
Here, the trade balance in the country has climbed to a healthy positive net export. Here, there
have been considerably more exports than imports, as, over the years, the value of the rand has
depreciated from 6.64 ZAR = $1, in 2010, to 14.63 ZAR = $1 in 2020. Here, South African
products have become cheaper, while foreign products have become more expensive. More
purchases of the South African Rand have taken place and fewer purchases of the US Dollar.
Now while the rand has depreciated, South African trade has struggled, since their exports are
not internationally sought after, hence reducing their trade balance.

Business Cycles and GDP growth in South Africa

The South African economy has seen its growth rate fall from around 3.5% in 2011 to around
0.9% in 2019. This has been due to several reasons such as the youth unemployment rate
reaching a record high of over 50%, exports crashing with a record trade deficit in April (-35
Billion ZAR), and lack of industrialization in areas with high potential and areas with the high
participative workforce. At the same time, while the cost of doing business in South Africa is
very low, the ease in getting the required regulations is very difficult, and the regulations are a
built-in way to restrict competitive practices.

Analysis of Macroeconomic Policies

Interest Rates: When framing any fiscal policy, the central bank ought to lower interest rates,
to increase credit access in the domestic economy. However, from 2014 till January 2020, the
interest rates were extraordinarily high and much more than the global average or the

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recommended rate. This was despite a deflationary trend, where the inflation rate was at a
record low, of below 4%. At the same time, many other countries were using fiscal measures
that had a lowered interest rate, to increase capital investments in emerging sectors like
agriculture, among other industries.

Due to the COVID-19 pandemic, the Monetary Policy Committee (MPC) of the South African
Reserve Bank (SARB), reduced the overall interest rate from around 6.25%, which was
announced in January 2020, to around 3.5% to help improve investor confidence during the
pandemic. However, the GDP is still looking at a major contraction in 2020, with 2 to 3%
growth aimed for, during 2021 and 2022.

Impact: Due to the lower interest rates, the property market has taken off, and is being driven
by buyers who are having stable employment irrespective of the pandemic. The affordability
of mortgage financing has allowed buyers to move into bigger and better homes.
Note: Below, are the interest/repo rates in South Africa

Taxes: The South African central government has come up with an aggressive tax structure,
which consists of 7 different tax slabs, taxing citizens from 18% to 45%, based on their income.
The average income for a South African household is ZAR 257,184. However, any income up
to ZAR 195,180 is already taxed 18%, making South Africa, the 8 th most taxed country in the
world. Here, the central government earns most of its revenue through taxes. In 2017-18, the
central government raised 1.22 trillion ZAR in personal income taxes. However, due to poor
mismanagement of money and corruption, this money has not been able to be put into use
effectively.
Also, the tax structure is not appropriately placed. While high-income earners do pay more in
taxes than low-income earners, high wealth individuals still pay less proportionately. At the
same time, capital gains tax is low, taxes on inheritance are also at 20% and there is no net
worth tax in place either.
In 2018, the South African government increased the VAT (Value Added Tax), a tax added to
general commodities from 14 to 15%. This tax was more likely to affect low-income
households more when compared to high-income households. At the same time, the central
government during 2010-20, had given a lot of tax structures which offered tax breaks to the
high-wealth individuals, thus reducing the total number of taxpayers.

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Debt: South Africa’s debt to GDP ratio, which currently is 0.656, is the 8 th highest among the
top 25 emerging markets. While, South Africa’s cost of borrowing is very high, with 2-, 5- and
10-year bond rates ranging at 6.7, 7.5, and 8.5% respectively, the average bond rates for
emerging countries during that same period were 4.1, 4.3, and 4.8%. This shows that South
Africa has to be careful to not default, or else would have their interest rates increased.
However, the practice of increasing government borrowing is necessary for fiscal expansion
and enhanced human capital development. Short term debts, if accurately and wisely used, can
help the South African government bridge the gap between the high wealth and low wealth
individuals through their socio-economic reforms.

Multiplier Effect in South Africa

1980 2010 2019
1.82 1.60 1.47
Here, the fiscal multiplier has been reducing over the years, showcasing the stability of the
economy. Previously, there existed a higher fiscal multiplier, which mostly showcased a high
aggregate demand and employment rate, but which could also seem magnified. However, due
to the increase in unemployment rates, stagnation of household incomes, reduction in
consumption, and the overall openness of the South African economy, post-apartheid, it could
explain the decline in the fiscal multiplier. Here the national income and product demand
increase 1.47 times the increase in investment.

Comparison of Macroeconomic Policies and Performance

Note: For purposes of understanding the macroeconomic policies and their subsequent
performances pre-COVID, the group has analyzed up to 2019, and taken 2020 separately into
account.
Before COVID-19, the country had a historically high-interest rate of 6.5% and a reducing
inflation rate of 4.2%. At the same time, the GDP was growing at a rate of 0.8-0.9%, which
was a record low for emerging markets. At the same time, the debt to GDP ratio was around
0.656, which was the 8th highest among the top 25 emerging/developing countries. The cost of
borrowing was also almost double the rate for other emerging countries. The country was also
one of the countries which were taxed the highest, and also one of the countries with over 50%
in youth unemployment. The trade done by South Africa was not very impressive, as their
major exports were not exactly aligned with the global direction. However, they were
registering a net positive export, year-on-year. Apart from this, the exchange rate had nearly
doubled from around 6.6 ZAR to around 14.63 ZAR.

These results between 2010-19 have been due to macroeconomic policies that have not been
decided properly. For example, the country, without an increase in demand, increased its
interest rates, in an urge to control inflation. However, it was ineffective against cost-push
inflation, and the inflation rate was consistently above 5%.

Apart from this, the country has consistently borrowed money, yet has not worked on using it
to improve the unemployment rates, which have always been going upwards from 2011

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onwards. Their debt to GDP ratio is projected to hit between 0.75 and 0.8 in 2023. The country
needs to start focusing on areas in South Africa, where the non-participating labor force is high
and there is a high potential for industrialization.

Inflation rates have risen, for most of the decade to due a sort of monopolistic trend that was
seen, and the lack of major businesses in South Africa, as there was no ease in doing business.
Housing and food contributed to most of the rates. This has brought about a reduction in
expenditures and consumption, which had impacted the country’s domestic economy.
However, the central government has been able to bring that under control.

In 2020, the country initially brought down their interest rate from 6.5% to 6.25% and then
again to nearly 3.5%, their lowest interest rate, since measurements began in 1998. With the
current pandemic, the interests and inflation rates are within control, however, with such low
interest rates, there could be a possibility of an increase in inflation, which could bring more
people to the verge of poverty.

54% of households who have lost their jobs are at risk of falling into poverty

When looking at the different sectors, most took a sharp decline. For example, the mining
sector (biggest in South Africa) declined by 73.1%, while manufacturing and construction
declined by 74.9 and 76.6%. The sole sector which grew was the agriculture sector, which
continued on its growth curve by 15.1% due to fruit and nut exports and better than average
winter rainfall.

Note: Other impacts or correlations between policies and performances of the South African
economy, might be present within the other sections.

Conclusion
Since the start of the COVID-19 pandemic, the global economy took a huge hit and so did
South Africa. ABSA Financial Group predicted the GDP contraction to 8.3% in 2020. Due to
the high rise in unemployment, expiration of government relief funds, and electricity issues, a
slow recovery is predicted, and pre-pandemic levels will take up to 2024 for a better
recovery.

‘The COVID-19 Pandemic takes us back 13 years’ – Thabi Leoka (Economist)

For a stronger recovery, there are certain enablers, which require more focus from the South
African central government and bank.

(i) Strong Economic Policy: Demand is slightly back up in South Africa, due to
improvement in the domestic economy. However, unemployment rates are going
out of control, inflation and interest rates are back on track, but need to be kept in
check. At the same time, aggregate demand and supply need to be balanced

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 appropriately. Consumption needs to increase and investor confidence should
improve. For this purpose, it is alright, if the South African rand depreciates a bit,
to enhance consumption.

(ii) Focus on Developing Skills, Creation of Jobs & Bringing Educational

Reforms: As industrialization increases within South Africa, there will be a huge
demand for skilled labor. For this purpose, there needs to be skill development
and reskilling unemployed youth in high potential areas.

(iii) Industrialization and Easing the Process of Doing Business: South Africa
is very inexpensive in terms of starting a business, cheaper than a majority of
countries around the world. However, due to tight regulations, South Africa ranks
139th in terms of ease in doing business. Encouraging more foreign companies to
invest in South Africa can increase jobs and better manufacturing and
infrastructure facilities can help in becoming more export-oriented and
normalizing the trade balance.

For this purpose, President Ramaphosa has pledged to raise $100 billion to
help Foreign Direct Investment (FDI) till 2023.

References
1) https://businesstech.co.za/news/finance/432018/south-africas-gdp-tanks-51-in-the-second-
quarter/
2) https://oec.world/en/profile/country/zaf
3) https://www.resbank.co.za/en/home/publications/review/monetary-policy-review
4) https://www.brookings.edu/wp-content/uploads/2016/07/TT20-south-africa_bhorat_hirsch-
2.pdf
5) https://www.cb.is/library/Skraarsafn---EN/FromOldWeb/Acrobat-(PDF)/mb001_6.pdf
6) https://www.focus-economics.com/countries/south-africa
7) http://pubdocs.worldbank.org/en/798731523331698204/South-Africa-Economic-Update-
April-2018.pdf
8) https://www.bloombergquint.com/global-economics/s-africa-central-bank-sees-gdp-
shrinking-32-6-in-quarter-two
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africa/long#:~:text=While%20average%20real%20wages%20increased,5%5D%2C%20%5B
6%5D.
10) https://www.wider.unu.edu/publication/demographic-employment-and-wage-trends-south-
africa-0
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africa
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