Macroeconomic Analysis of South Africa - Research Paper Example

? Macroeconomic Analysis South Africa is regarded as one of the most important economies in the world. It is an economic hub of African mainland. Even though the financial structure of South Africa is improving, it is observed to face two most important macroeconomic problems (i.e. unemployment and electricity) which can have a substantial impact on the industrial development of the economy. The paper analyzes the extent of these problems and how the government reacts with the problems through developing macroeconomic policies. Furthermore, the paper also describes the hospitality industry in South Africa and its relationship with current macroeconomic issues faced by the country in order to understand the potentiality of instigating a new venture in the particular industry. Introduction South Africa is regarded as the economic centre of the African continent. It has outstanding and advanced legal structure. The financial system of South Africa is currently observed to be in a cultured and healthy position. South Africa is not only considered as a major developing economy, but is also as the gateway to other African markets. In the African region, South Africa plays a vital part for energy generation, transportation, industrialization and hospitality services among others (SouthAfrica.info, 2012). South Africa has received praise from numerous international economists for its renovation of macroeconomic strategies since 1990s. Through macro-economic development, South Africa had shown the obligation towards free market, denationalization, and a favourable investment environment by shifting from previous government strategies of import distribution and industrial development which protected local industries with high rate of tariff restrictions (Ploch, 2011). However, South Africa’s macroeconomic stability is endangered due to numerous problems such as unemployment rate, electricity production and unequal income distribution among others. The paper will describe the macroeconomic environment of South Africa as well as present an analysis of hospitality segment for instigating a new business venture. Therefore, the paper focuses on highlighting and analyzing two significant issues of the economy and its relationship with the hospitality industry for conducting the planned business. Hospitality Segment in South Africa Similar to any other industry, the hospitality industry has to face a significant impact due to the economic condition in any country. The economic conditions prevailing within an economy determines the trend of travel and thus the profitability of hospitality sector. Hotels require a major financial investment. Nevertheless, financial suppliers necessitate guarantee that the hospitality organizations are satisfactorily feasible to repay the invested amount. The situation of hospitality market is generally determined by income per room and occupancy rates. Increasing occupancy rate in hospitality industry denotes high demand which can open the opportunity for new entrants in the hospitality industry. It is worth mentioning that the hospitality industry is directly related with national as well as distant travelling trends for tourists and commercial visitors (PwC, 2011). Hospitality organizations can gain high return on investment in the presence of strong and healthy economy. For instance, the macroeconomic factor such as growth rate has major impact on the travel because it entices and preserves customers and drive sales within the industry. Furthermore, the condition of economy creates an impact on both domestic as well as global corporate travel. It is in this context that South Africa has satisfactory demand for hospitality services. With the virtues of the macroeconomic environment prevailing in the business context of South African hospitality industry, the number of overnight visitors in South Africa has increased considerably from 2004 to 2006 by almost 10.23 million. The increase in number of travel has accelerated the room occupancy rate as well as hotel revenue (PwC, 2011). The following graph will show the increased number of visitors in South Africa: Source: (PwC, 2011). From 2005 to 2008, the number of hotels in South Africa had increased substantially because of constant growth of the economy. Although, South Africa was highly influenced by the economic crisis, it had improved in 2010 with growth of 3.2%. In 2010, the number of travellers in South Africa was almost 13.2 and it is expected that the number will increase to 14.5 by 2015 (PwC, 2011). The following graph will describe the travellers of South Africa for 2004 – 2015: Source: (PwC, 2011). Macroeconomic Analysis of South Africa South Africa’s economic condition has been completely renovated since the arrival of democracy in 1994. Macroeconomic improvement of South Africa has enhanced marketing competitiveness, developed financial structure and created employment opportunities for people. Over the years, several macroeconomic policies of South Africa have helped to build a solid infrastructure for hospitality industry. The taxes have been reduced, tariffs have been released, fiscal shortfall reined, inflation restrained and exchange control relaxed. In the year 2006 and 2007, South Africa displayed its first budget surplus of almost 0.3% and the inflation rate arrived at below 5% during 2006, which indicates its strong macroeconomic performance (SouthAfrica.info, 2012). However, South Africa could not escape from the economic crisis during 2008. During that time period, the country’s economic growth rate dropped to 3.7% and in 2010, it again increased to 2.8%. South African economy was also affected by political uncertainty caused due to the poverty afflicted communities which surrounds the cities across the nation (Ploch, 2011). Economic issues in South Africa South African economy comprises several issues and two most important of them are unemployment and lack of electricity. Assessment of Unemployment Issue Poor administrations and uncertainty of politics have presented an inevitable negative impact on South Africa’s economy, historically. The country continues to face great invasion of unlawful migrants. Several estimates suggest that almost 3 million Zimbabweans live illicitly in South Africa. According to the viewpoints of South African people these high level of emigrants is one of the most significant reasons for unemployment issue (Ploch, 2011). The unemployment rate is quite high in South Africa compared to other countries globally. It was estimated that almost 25.5% of South African workforce was unemployed in 2006. Unemployment is considered as the most critical macroeconomic issue faced by South Africa (Harmse, Blaauw & Schenck, 2008). Unlike other emerging nations, where vast form of unqualified employees has retained the labour rate low, the government of South Africa, in agreement with its politically influential labour union, has been unable to make that happen as was intended. Due to the policies of the government, the wage rate of South Africa is five times more compared to the wages of Indonesia in the current scenario. Although, the wage rate is high in South Africa, the productivity of labour is not proportionately higher (Economy Watch, 2010). The major problem faced by South African labour force is inappropriate skill, inadequate employment oriented knowledge, and lack of elementary education. Furthermore, the unemployment rate varies between groups in the South African society, which indicates toward great inequality in the proportion of unemployment. Moreover, the differences in unemployment throughout different groups have crucial implications for the allocation of income and occurrence of poverty with the economy (Economy Watch, 2010). In order to increase the employment rate within the economic context, the South African government has developed a macroeconomic policy named Growth, Employment and Redistribution (GEAR) for accomplishing a macroeconomic balance in the country. However, the GEAR strategy was criticised largely because it had constrained the economic development to a certain extent which has significantly influenced the usual levels of unemployment, disparity and poverty. The strategy was developed to decrease the outlay of government without equivalent measures to encourage the growth of investments or exports and thus muffled the economic growth. The performance of GEAR was also dwarfed by the international financial crisis which in turn minimized the demand of South African exports and as a result it had also affected the number of labours in the South African organizations (Khamfula, 2004). In South Africa, the existing employment opportunities seem to be less effective for African job chasers in comparison to the Whites. It was likely due to the longitudinal separation between business sectors and the remote areas where Africans live. The absence of inexpensive public transportation certainly contributed to the problem of unemployment in South Africa. Generally, the informal segment provide majority of employment opportunities in a country, particularly in outlying areas, but in South Africa the informal segment has developed in little rate which also increases the unemployment issues in the country. Apart from these issues, the crime rate and high initial expenses to introduce small businesses possibly obstructed the employment growth in South Africa (Banerjee, Galiani, Levinsohn, McLaren & Woolard, 2008). Assessment of Electricity Issue The other most significant potential threat for the economy of South Africa is lack of electricity production as per the growing demand. Due to swift industrial development and mass electrification, the demand of electricity has increased rapidly. In the year 2008, South Africa had to experience numerous electrical power cuts which have affected the economy to a certain extent. The electricity rendered by South Africa to other neighbouring nations was also affected by the power shortages (Ploch, 2008). The economy of South Africa generates and consumes high amount of electricity being considered as a mass energy demanding nation. Energy is crucial for the overall development of South Africa, especially in order to entice the foreign direct investment. The demand of energy is expected to grow as South African economy continues to flourish. It is in this context that increasing power shortage in South Africa can lead to serious threats to the constant economic expansion and global effectiveness. In the face of considerable new investment opportunities, there is requirement of electricity for operational efficacy (Kessides, Bogetic & Maurer, 2007). In South Africa, there are three extents to the electricity issue which relates with the capacity issue, supply issue and reserve margin issue. While these issues are connected, they have diverse key reasons and necessitate different reactions within the economy. The capacity problem is triggered by the gap between the installed power production ability and highest demand of electricity in the country. In this case, the solution is to increase the capacity of producing electricity through investment and on the demand side to decrease the peak demand of electricity. The supply issue is initiated by the gap between utilization trends and capability to supply electricity. In this regard, the supply of electricity depends on technical necessities for maintenance and availability of input, i.e. chiefly coal. For instance, in South Africa there is restriction on production of electricity instigated by the quality and quantity of coal deliveries. On the other hand, the reserve margin issue occurs when gap between power generation capability become insignificant to satisfy the unexpected flows in demand of electricity. In South African context, the electricity problem is caused by reserve margin issue where the demand of electricity has increased faster compared to the functioning efficiency. It resulted in fewer times for maintenance and the equipment for electricity has been performed extensively which is above optimum level. Therefore, it minimized the buffer for unexpected electricity requirements and time leads to interruption of power supplies (Altman, Davies, Mather, Fleming & Harris, 2008). Solution of Unemployment Issue In economic term, unemployment can be described by two theories which are Keynesian unemployment theory and Classical unemployment theory. The Keynesian theory describes unemployment as lack of adequate cumulative demand of labour in the product market. It can result in low degree of capacity consumption by organizations and low demand of labour. Thus when sellers are restricted in the market (i.e. they are unable to sell everything they generate), limits of employments in the labour market arises. According to Keynesian theory, demand of labour is displayed as total demand of products or services divided by usual labour efficiency in the economy. In the presence of Keynesian condition in economy, increasing collective demand for products or services minimizes the level of instinctive unemployment. However, even in economies where demand of products or services is high, unemployment can exist. The overall rate of employment can reduce despite of the progress in aggregate demand and investment. The second theory i.e. classical unemployment theory can describe this situation. According to classical employment theory, a preceding adequate rate of accumulation of employment engrossing fixed capital generates a condition in which, at full capability operation, demand for labour becomes short of supply. In order to overcome the classical unemployment situation, there is need for high level of investment by government in the industrial sector in order to engross the labour surplus. In South African context, the high level of unemployment is extensively assumed to be an operational problem which cannot be validated as absence of demand. South African unemployment is a Classical characteristic rather than Keynesian characteristic of an economy in which inadequate rate of capital accretion supported to the extensive absence job opportunities (Heintz, 2000). The hospitality and tourism are the fastest increasing sectors in the economy of South Africa and thus acts as a boosting factor in creating employment opportunities and investments. Prior to the economic recession, the hospitality segment had increased significantly i.e. 9 million tourists in 2007 to 10 million by 2010. In the business context of South Africa, the hospitality and tourism development plays significant part in the poverty and unemployment issue (Fair Trade in Tourism South Africa, 2009). Since 1994, the hospitality and tourism segment was recognized as the key catalyst for economic development in South Africa. Due to this reason, government has boarded on various advantages in order to develop this industry in a justifiable and responsible way, and to exploit its real potential with respect to country’s rich, dissimilar and striking tourism activities. Furthermore, there is substantial local movement and stress on hospitality related economic development planning in large capitals, smaller sections and rural regions (Ploch, 2011). In the year 2005, the government of South Africa unveiled a new macroeconomic strategy named “Accelerated and Shared growth Initiative for South Africa” (ASGISA). The new strategy was developed to increase the economic growth and reduce the unemployment rate by 2014 (Ploch, 2011). The tourism and hospitality industry has been thus observed as the key channel to recover the employment of groups which reside in the undersized economy. Tourism employs almost 3% of employment in South Africa. Thus, in the prevailing high unemployment rate, hospitality and tourism can be regarded as largest employment provider (Ploch, 2011). Through necessary policy interventions and looming in the “2010 World Cup”, the government of South Africa attempted to increase the growth of tourism and hospitality industry (CUTS International, 2007). Thus, sports management can be referred as the other sector in South African economy which helps to attract international attention and enhance tourism and financial development. In order to manage the huge sporting event (i.e. 2010 World Cup), South Africa invested almost US$5 billion for building and infrastructure developments, renovation of the international airports, construction of new airports, addition of computerized rail connections, expansion of major highways, development of stadiums, and improvement the telecommunication systems. The sports had caught enough attention with third highest turnouts in the history of football sports. The economic impact of sport was also enormous in terms of economic development. For instance, the World Cup 2010 had drawn around US$500 million foreign exchange and added extra 0.5% to the Gross Domestic Product (GDP) of the country (Ploch, 2011). Solution of Electricity Issue The electricity issue can threaten the growth of sport as well as the tourism sector in South Africa. The impact of load-shedding might have negative impact on the hospitality industry, probably distressing the reservation for sports. Thus, it should be regarded as a caution for the government to ensure that electricity problem does not trouble the guests and hotel organizations to perform at required capability. In addition, to numerous logistical issues in hospitality industry, the safety and security of travellers can decline considerably if the power cut happens at substantial rate (Kessides, Bogetic & Maurer, 2007). The price of electricity in South Africa is quite low compared to other nations (i.e. 3US cents/kilowatt for domestic and 2US cents/kilowatt for non-domestic customers). The standard rate of electricity globally is almost 9US cents/kilowatt for domestic customers and 6US cents/kilowatt for non-domestic customers, which is much higher than the rate applied in South Africa (Kessides, Bogetic & Maurer, 2007). Thus, this low price of electricity can increase the gap between South Africa and other countries in the world with respect to electricity capacity enlargement. In order to increase the substantiality and provide financial support to new electricity capacity, there is need for reassessing the charged price of electricity. High price of electricity will also result in effectual and operational consumption of power within organizations as well as in households (Kessides, Bogetic & Maurer, 2007). However, there are certain negative impacts on increasing the cost of electricity. The high cost of electricity can reduce the competitive advantage of hospitality organizations due to increase in operational expenses. Besides, it can also hamper the foreign direct investments in the industry of South Africa. Conclusion Several analysts predict that South Africa will remain economically attractive for tourism and hospitality sector. Even though there are some unemployment and electricity shortage issue that South Africa is currently facing, the overall market attraction of South Africa is satisfactory. With proper implementation of macroeconomic policies of government the unemployment issues and power cut problems can be resolved. The hospitality sector acts as a conduit for economic development in South Africa and the government had taken several initiatives (such as organizing sporting events) in order to improve this segment. The market trend clearly indicate that there is growing demand for hospitality services in South Africa and several people outside and within the industry observed the similar opportunities. Thus, South Africa is recognized as good destination for investing and providing capital for instigating a hospitality business. References Altman, M., Davies, R., Mather, A., Fleming, D., & Harris, H. (2008). The impact of electricity price increases and rationing on the South African economy. Retrieved from http://www.hsrc.ac.za/research/output/outputDocuments/5687_Altman_Theimpactofelectricitypriceincreases.pdf Banerjee, A., Galiani, S., Levinsohn, J., McLaren, Z., & Woolard, I. (2008). Why has unemployment risen in the new South Africa? Retrieved from http://economics.mit.edu/files/2883 CUTS International. (2007). The impact of the tourism sector on trade, development and poverty in South Africa. Retrieved from http://www.cuts-citee.org/tdp/pdf/Case_Study-The_New_Gold_Mine_of_Tourism.pdf EconomyWatch. (2010). South Africa unemployment. Retrieved from http://www.economywatch.com/unemployment/countries/south-africa.html Fair Trade in Tourism South Africa. (2009). Human rights and business project South Africa. Retrieved from http://www.fairtourismsa.org.za/pdffiles/Sectoral_Determination_14_Implementation.pdf Harmse, A. C., Blaauw, P. F., & Schenck, C. J. (2008). Day labourers, unemployment and socio-economic development in South Africa. Retrieved from http://www.econrsa.org/papers/p_papers/pp11.pdf Heintz, J. (2000). Distribution, investment, and employment in South Africa. Retrieved from http://www.tips.org.za/files/407.pdf Khamfula, Y. (2004). Macroeconomic policies, shocks and economic growth in South Africa. Retrieved from http://www.imf.org/external/np/res/seminars/2005/macro/pdf/khamfu.pdf Kessides, I. N., Bogetic, Z., & Maurer, L. (2007). Current and forthcoming issues in the South African electricity sector. Retrieved from http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2007/04/09/000016406_20070409134933/Rendered/PDF/wps4197.pdf Ploch, L. (2008). South Africa: current issues and U.S. relations. Retrieved from http://fpc.state.gov/documents/organization/112039.pdf Ploch, L. (2011). South Africa: current issues and U.S. relations. Retrieved from http://www.fas.org/sgp/crs/row/RL31697.pdf PwC. (2011). Making room for revenue South African hospitality outlook: 2011 – 2015. Retrieved from http://www.pwc.co.za/en_ZA/za/assets/pdf/hospitality_survey.pdf SouthAfrica.info. (2012). South Africa: economy overview. Retrieved from http://www.southafrica.info/business/economy/econoverview.htm Read More