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World Bank lowers SA growth forecast, says labour strife poses downside threat

29th May 2013

By: Natalie Greve

Creamer Media Contributing Editor Online

  

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JOHANNESBURG (miningweekly.com) – The World Bank has lowered its 2013 economic growth forecast for South Africa to 2.5% in its latest South Africa Economic Update, having projected growth of 3.2% in July.

“This is against the backdrop of subdued external demand subject to significant downside risks and a domestic investment climate weakened in particular by labour strife,” lead economist Sandeep Mahajan said at a media briefing on Wednesday.

The report forecasts gross domestic product (GDP) growth of 3.2% for 2014 and 3.3% for 2015, with the 2014 outlook also lower than the 3.5% published in the bank's July 2012 Economic Update.

The bank said that South Africa’s potential GDP growth declined to 3.1%, from 4% during the economy’s boom period and 3.5% since the start of the crisis.

The downward revision came after Statistics South Africa reported that growth slowed to its weakest since the country’s 2009 recession, with the economy expanding by only 0.9% on a quarter-on-quarter basis during the first quarter of 2013, from 2.1% in the fourth quarter of 2012.

The bank’s economic forecast is also lower than the 2.7% growth for 2013 and 3.5% for 2014 that the National Treasury forecast in the Budget, delivered on February 27.

The World Bank attributed the lower forecast to several factors, including delays in the introduction of new electricity generation capacity, a marked decrease in the savings rate to 14%, and labour unrest across a number of industries, notably the mining sector.

EXTERNAL THREATS

“Another risk to South Africa’s growth outlook includes its increased exposure to global financial markets, in which larger, troubled European Union (EU) States are open to the risk of credit freeze, which could translate into an up to 0.9 percentage point drop in the country’s growth,” Mahajan commented, adding that the global economic recovery remained fragile and susceptible to downside risks.

This was despite observations that conditions in global financial markets had eased considerably since mid-2012, reflecting further monetary stimulus provided by high-income country central banks, improved fiscal sustainability in developing countries and the establishment of mutual support mechanisms in the EU.

“Global recovery is more uneven across country groupings, with stronger recovery expected for the US and Japan than for the EU, and return to robust growth predicted in the large emerging markets,” said Mahajan.

Fiscal consolidation in the US could also hamper local growth, as could China’s progressive transition from an investment-focused to a consumption-focused economy, which, if disorderly, may drive a 0.3 percentage point decrease in South Africa’s GDP.

FINANCIAL INCLUSION KEY

Meanwhile, the World Bank report claimed that the local slowdown had put into sharper focus the key structural challenges facing South Africa in its pursuance of higher and more inclusive growth.

Among these was the required expansion of access to financial services for both individuals and small enterprises, which, according to the bank, could aid in reducing poverty and inequality and stimulating job creation.

It believed that financial inclusion was critical to economic growth.

“The transformative power of financial inclusion in South Africa should not be underestimated. Improved access to finance by poor households and microenterprises can unlock income-earning opportunities and self-reliance for many,” said World Bank country director for South Africa Asad Alam.

The report found that over 12-million people in South Africa were “unbanked”, which meant that they did not have bank accounts, while the majority of those that did were “under-banked”, or did not use their bank account in a meaningful way.

While World Bank adviser Michael Fuchs added that, on an aggregate basis, access to financial services in South Africa was good, there were significant inequalities in the ease of access, which reflected the duality of the local economy.

“South Africa has a sophisticated financial system, but it has been designed to service the country’s formal, developed economy, and not its developing economy, in which most of the population is represented,” he said.

The report found that some 84% of all services offered by South Africa’s four biggest banks – Standard Bank, Absa, First National Bank and Nedbank – focused solely on the needs of the country’s developed economy.

Supply-side challenges also played a role in the perpetuation of financial exclusion, with particularly inadequate competition in the banking sector, the near absence of microfinance institutions and an “inordinate” emphasis on payroll lending.

Fuchs acknowledged that the regulatory environment also influenced financial inclusion, but emphasised that it had to reflect other policy considerations, such as ensuring a stable financial system.

“Having said this, the current regulatory environment essentially protects the role of banks. For example, there is no viable tiered licensing and regulatory framework for nonbank service providers, such as the major retailers and mobile networks.” he commented.

Fuchs believed that there could be a high payoff from the addition of a tiered licencing system that opened the market to institutions that could service “unbanked” and “underbanked” individuals, as well as small and microenterprises.

“Global experience shows that less endowed segments of the population are best serviced by specialised institutions with a cost structure and business model adapted to their needs,” he said.

The World Bank report found that the large existing mobile network operators and organised retail chains, such as the Edcon group and Checkers, were well placed to offer certain financial products in a cost-effective and competitive manner.

Fuchs argued that, while various retailers, mobile operators and third parties were interested in offering retail payment services, they were stifled by regulations that only allowed market entry in partnership with an existing bank.

“Regulation needs instead to support innovation while still reflecting risk. The mechanism needs to be appropriate for the local environment, to encourage competition and be proportional to the level of risk introduced by the product or service,” he said.

Edited by Creamer Media Reporter

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