South Africa in a tight spot

It has not been a good year for South Africa. Its currency, the rand, has slid 15 percent against the dollar because of sluggish growth, stubbornly high inflation and the flight to safety sparked by the Fed’s announcement in May that it would likely scale back its $85 billion-a-month stimulus programme before the end of the year. Unemployment currently stands at 25.6 percent. The economy managed to grow by 3 percent in the second quarter but is projected to slow in the second half of the year. Ongoing strikes have cost it billions of dollars in lost output and tainted its image among investors abroad. The three major credit agencies downgraded its credit rating to Triple B.

The barrage of downbeat economic news has come from a country until recently considered the economic powerhouse of the continent and which contributed 40 percent of the GDP of Sub-Saharan Africa. Yet last week its central bank governor, Gill Marcus, said that at its current growth rates South Africa risked being overtaken by Nigeria as Africa’s biggest economy within a decade. Furthermore, sluggish growth coupled with high inflation, which hit 6.4 percent in August, mean the central bank is in a tight spot. The sickly growth rate and high unemployment rate would call for an interest rate cut, but with inflation already breaching the central bank’s target range of 3 to 6 percent it has little room for manoeuvre.

To be sure uncertainty over the Fed’s next policy move has weighed heavily on Africa’s biggest economy. Given that South Africa relies heavily on foreign capital to finance its current account deficit, which is around 6 percent of GDP, it was particularly badly hit when investors pulled their money out of emerging markets at the prospect of the pool of cheap dollars drying up. In fact, after the Fed’s surprise announcement that it would not taper in September after all, the rand picked up a little but still has not lifted itself back to its former levels.

The economy was been badly hit by the wave of violent labour unrest in some of the country’s most important sectors, such as mining and motor manufacturing. The strikes have not been as long as last year but have definitely not burnished the country’s image abroad.

To top it all off the politics has not been that great either. The ruling African National Congress (ANC) which has been in power since the end of apartheid in 1994 has been suffering from internal splits, enduring inequality and poverty as well as corruption. Many young people in South Africa do not feel their living conditions have improved and feel increasingly disaffected with the ANC. Deputy President Kgalema Motlanthe called the country’s staggeringly high youth unemployment, which stands at 50%, a “ticking time bomb.” High levels of youth unemployment can lead to social unrest and there are fears within the ANC that South Africa is running the risk of an Arab Spring. If President Jacob Zuma is to win next year’s election and prove that his party has not failed the country he needs to step up his game.

The numbers: BRIC vs. G7

Born as a simple marketing idea, the acronym "BRIC" is starting to symbolize the shift of the needle of the balance of the global economy from the industrialized nations to the emerging economies. 

.... But perhaps all that glitters is not gold, and even if the BRIC nations have been recording an impressive growth in the last few years and can count on a massive labour force and significant resources, they are still far from being comparable with the G7. Their GDP to Population ration is 14 times smaller than ours and the wealth is even less equally distributed than in the G7 countries (with the US being the most unbalanced having a Gini coefficient of 0,47).

Gini Coefficient: The Gini coefficient is a measure of the inequality of a distribution, a value of 0 expressing total equality and a value of 1 maximal inequality.

GDP: Gross domestic product (GDP) refers to the market value of all final goods and services produced in a country in a given period.

Is Italy the next Greece?

The sovereign debt crisis in Greece is still at its dawn, but the repercussions on other weak countries like Portugal, Spain, Ireland... and Italy (whose public debt is 115% of its GDP and 6 times larger than Greece's) is becoming every day a bigger issue. 


Italy has done better than Greece in taking care of its fiscal matters during the crisis but the ratio between its debt and its GDP is still higher than Greece's, and its competitiveness is obviously directly proportional to its debt. This means that even if contagion from Greece is controlled, Italy remains very vulnerable in this uncertain time of post-crisis global economy.


In order to remain a member of the Euro area Italy should take action: adopt a 3 year program to raise its main balance by, minimum, 4% of its GDP and and put together a real devaluation vis-à-vis Germany of at least 6% through wage cuts and far-reaching long term structural reforms. Unlike Greece, Ireland and the Baltic countries, Italy is still in time to take action and avoid the eruption of the economy.
However, political Europe should also make the adjustment easy by targeting a weaker Euro, in which the G20 also has a vital interest as this would aid the continuation of a global recovery.


As in other countries, since the beginning of the crisis, debt in Italy and Greece has grown. In the biennium 2008 2009 Greece had public deficits twice the size of Italy's and added about twice as much debt as a share of GDP. This does not change, though, that Italy's Government debt is comparable to that of Greece.


Debt as % of GDP, Current and Projected

	2009	2011	2014
Japan	218.6	231.9	245.6
Italy	115.1	123.5	128.5
Greece	113.4	126.8	--
Belgium	97.9	104.9	--
United States	84.8	97.7	108.2
France	77.4	86.6	92.6
United Kingdom	72.9	89.3	98.3
Germany	72.5	87.8	89.3
Ireland	64.5	87.9	--
Spain	55.2	66.9	--
Sources: European Commission, IMF, OECD. Actions to recovery: A 3 year plan. Italy must not wait for its economy to break down before addressing its attention towards a recovery plan. In the next 3 years it must increase its primary balance by 4% of its GDP to ensure that the ratio between debt and GDP begins to decline.  Italy shall cut its unit labor costs and put in act a critical structural reform in order to reverse its loss of competitiveness. Critical structural reforms should include: removing rules that create a dual labor market and increasing the efficiency of backbone services on which depends the competitiveness of all firms in the economy.  In conclusion: Europe’s potential debt crises poses a large risk to a sustained global recovery; policy changes are the premiums the world needs to pay to insure against another collapse.