Trade in South Africa - Case Study Example

Trade in South Africa of the of the Table of Contents Introduction 3 Current account and trade trends 5 Trade composition 5 Trade destination 6 Trade regulation 8 FDI trends 9 Portfolio investment trends 10 Official foreign exchange and gold reserves 11 Trends in factor mobility 12 Exchange rate policy 13 Nominal exchange rate 14 Real exchange rate trends 14 Crisis 15 Conclusion 15 References 17 Introduction Since the first common suffrage elections held in the year 1994, the African National Congress (ANC) has held a majority of the National Parliament and currently they hold a little less than two third required to modify the constitution. The Assembly elects the president of the country and due to that the ANC has had significant control over the executive branch since 1994. The ANC nominates the president of its party customarily in order to serve as the president of the country. The assembly elected the current active ANC president, Jacob Zuma as the national president in 2009. In the year 2012, heavy political attention in the country was focused on selecting the top leadership panel of the ANC at national conference meets of the part in late 2012. Over the entire year of 2012, there were speculations regarding the fact the president Zuma might be challenged successfully as he was criticized for many of his actions over the recent past and so was the ANC. However, in the end, the party designed an effective reelection campaign and foiled an ill coordinated and belated rival election campaign by their deputy Kgalema Motlanthe. It is almost certain that president Zuma will win a second term as the president of South Africa (World Bank, 2014a; Cook, 2013). The economy of South Africa is the largest in Africa and is very diverse. The country is a famous producer of wine and they export wide-range of agricultural products such as maize, sugar, wool and fruit. However, it is noteworthy that only 10% of the overall land is arable and agriculture contributes about 3% of the total gross domestic product (GDP). Industrial contributions to the gross domestic product are much higher than that of the agricultural sector (31%). The country is the leading producer of chromium and platinum and is also a producer of diamond and gold (Cook, 2013). The other major industries which have a significant contribution towards the overall economic development of the country are chemicals, foodstuff, textiles, automobile assembly, steel and iron industry. The rate of inflation reached an all time high in the year 2008 (10.04%) suggesting that the population had to pay considerably high price for availing goods and services. However, since then the government of South Africa has adopted effective measures in order to bring down the inflation rate. The inflation rate has reduced drastically from 10.04% in 2008 to 4.10%, 5.01% and 5.75% in 2010, 2011 and 2012 respectively. The service industry in South Africa has the largest contribution in the overall GDP (67%). The country’s GDP over the past few years has augmented by a huge margin (0.5% of GDP from 2005 till 2008 to 5% of GDP from 2009 till 2012. Due to the increase in population, the real GDP growth per capita has also fallen behind the country’s GDP growth rate. An insufficiently educated workforce is widely regarded as a major barrier to growth. As far as comparing the education system and quality in South Africa to that of other developed and developing countries are concerned, it is quite poor. High rate of unemployment, diverse needs for public infrastructure investment and restricted access to social facilities are also considered major hindrances to the economic growth of the country (Cook, 2013). Inflation Rate (Source: Statistics South Africa, 2014) GDP (Source: Cook, 2013) Unemployment rate (Source: World Bank, 2014b; 2014c) Current account and trade trends (Source: World Bank, 2014d; 2014e) The current account of a country represents the measurement of a country’s trade related to the goods and services that are exported as well as the goods and services that are imported. As far as South Africa’s current account balance between 2007 and 2012 is concerned they have reported current account deficit. A country necessarily reports current account deficit when the value of the products and services that it imports exceeds the value of the products and services that it exports to other countries. Such has been the case of South Africa between the aforementioned time periods. The current account deficits recorded by the country reflects the negative net sales to foreign countries. The current account deficit reduced significantly in 2009 and 2010 and then increased to an all time high in 2012. The decrease in the current account deficit can be because of the fact that the country increased the amount of exports during that period. In addition, they also put certain restrictions on the amount of imports. Although the country has been recording a current account deficit over the past decade but it does not necessarily indicate a bad situation. For example, if the country is pooling external debt in order to finance their investments which will fetch them higher return compared to the rate of interest then the county can remain solvent if they are running a deficit in their current account balance. Trade composition (World Bank, 2014f; 2014g) Imports of goods and services (Source: World Bank, 2014h; 2014i) The products which are mostly exported includes wine, agricultural products such as, maize, sugar and wool, chromium, platinum, diamond, gold, steel, iron, foodstuff and textiles. The major export destinations of South Africa are Europe, USA and few Asian countries. South Africa imports many products in bulk from the US and Europe. The products include vehicles such as tractors and trucks, stones and metals, aircraft engines and other peripherals, electrical machinery. Majority of the products are exported from the US (Cook, 2013). The trade composition of South Africa seems relatively stable over the time period between 2007 and 2012 with no major fluctuations. It is evident from the table that the amount of imports (% of GDP) is higher than that of the amount of exports (% of GDP). The government under president Zuma has followed a private sector driven, free market economic model which was strengthened by large planned investments aimed towards facilitating economic growth, job creation and productivity. The planned investments made by the country supported infrastructure development, selected projects in the private sector, service jobs and job skills training. The underlying objectives behind making such investments were to enhance the economic growth and increase the rate of employment. The ‘New Growth Path’ was a medium level growth strategy adopted by the Zuma administration in the year 2010 at the centre of which is an industrial policy that is aimed at augmenting the economic output by increasing the amount of imports significantly. The policy paid dividends when the amount of exports increased in the year 2011 and 2012 relative to what it was in 2009 and 2010. The regulations stated under the policy were aimed at minimizing the rate of unemployment from 25% to 15% by the year 2020. The policy was framed in order to facilitate free flow of investments in five major sectors of the country: communication, energy, water, transport and housing. Trade destination Europe’s largest trading partner in the continent of Africa is South Africa. Till date, South Africa is the strongest of all the African countries. The country’s exports to the European countries have consistently increased over the past few years. In addition the mixture of these exports is becoming increasingly diverse. South Africa over the past few years has been steadily shifting to a diversified export portfolio consisting of manufactured products and commodity based products. Trades in goods between Europe and South Africa (Source: Europa, 2013) Trades in services between Europe and South Africa (Source: Europa, 2013) As far as the country’s trade relations with the US is concerned, it was the biggest non-oil focused trade partner of US in the year 2012 and the second biggest overall following Nigeria. When the last decade is taken into consideration, then South Africa stands in the third position on an average. Over the last decade the mutual trade in goods augmented by more than 210%. An increase from $7.7 billion in 2003 to $16.2 billion in 2012 was witnessed when South Africa became the 40th largest supply channel and 35th largest export destination for US imports and exports respectively. U.S. Trade with South Africa, 2008-2012 (% of GDP) (Source: Cook, 2013) Apart from Europe and the US, other major export destinations of South Africa are Germany, China, United Kingdom and Japan. As far as the import destinations are concerned, the major import partners are China, Germany, Japan, Saudi Arabia and United Kingdom (Big Media Publishers, 2014a). Trade regulation South Africa’s trade incentives are very liberal. The regulations for trade are framed in such a way that they encourage economic development and growth. The country is one of the members of the World Trade Organization (WTO) since 1995 as well as the South African Customs Union (WTO, 2014). The latter allows trade between South Africa and four other countries which are Lesotho, Swaziland, Namibia and Botswana. The business generated from imports plays a crucial role in the economy. Imports in South Africa are supervised by the South African Revenue Service and International Trade Administration Commission of South Africa (Expatica Communications, 2014). The fundamental operations of the ITAC include formulating trade remedies, customs tariff supervision, export and import control. Much of the goods can be imported to the country without any restriction. However, certain goods are subject to import permit. Every country maintains a certain regulation over the goods that enters and exits their boundaries. The goods that are subject to import permit are petroleum products, firearms, fish products, radioactive chemicals, ozone-depleting chemicals and gambling equipment. Restrictions to such goods help South Africa to protect their borders as well as their neighboring countries from any potential danger. Drugs, products related to pornography, gold, diamond, certain foodstuff, honey, wax, seeds, raw cotton, plants and bulbs are also prohibited under the import law of South Africa. Their trade regulations also prohibit the import of certain second hand goods such as cars. The country modified its shipping tariff in the year 1994 in order to comply with the global standards. The tariffs now stand lot simpler than before where the duties levied on goods range between 0 to 30%. Textiles are levied with higher duties and in some case the duty levied on certain goods exceed 30%. Given the fact that South Africa has an agreement of free trade with the European Union, tariffs are not levied for goods that are classified on the list of goods with free tariff. Importers need to pay duty on perfumes as well as alcoholic goods. Taking into account the health issues, the import of products related to agriculture are strictly monitored. Many agricultural products are prohibited from entering into the South African soil, particularly the ones which might spread disease. Importation of cherries, apples, pears as well as raw or irradiated meat is also restricted (WTO, 2014; Expatica Communications, 2014; Global Alliance of SMEs, 2014; Big Media Publishers, 2014b). FDI trends Foreign direct investment in South Africa (World Bank, 2014j; 2014k) South Africa has always been a persistent promoter of foreign investment and the government has always sought to promote itself as a gateway to the continent of Africa. The government actively encourages foreign direct investment with the underlying objective of strengthening the economic prosperity. This is precisely the reason why very few restrictions are imposed on foreign direct investment. The government of South Africa has taken numerous measures in order to draw investments from foreign countries. Among the numerous measures taken to promote foreign direct investment, the ones which are regarded as radical includes the opening of a special economic zone, formulation of industrial development zones, introduction of non-fiscal and fiscal incentives for making investment in specific sectors of the economy. Textile, clothing, film, automobile, business process outsourcing as well as the SME sectors will receive the benefits from the measures taken by the government. Another measure adopted by the country is the establishment of legislations in order to encourage investment in the green industry. In spite of having a lax investment regime, the Republic of South Africa does not have any specific legislation for FDI at present. In addition, the infrequent implementation of preconditions associated with empowerment of the economy as well as localization highlights the supposed lack of clarity in the country’s willingness to attract investment from foreign investors. This lack of clarity was witnessed in the negative response given by the Department of Trade and Industry when US retail giant Wal-Mart proposed a Rand 16.5-billion acquisition plan to acquire a controlling stake of the South African retailer Massmart. Portfolio investment trends (World Bank, 2014l; 2014m) The portfolio investment in the country of South Africa (both equity and debt securities) have largely fluctuated over the time period between 2007 and 2011. The major reason that can be attributed to this high degree of variance is the 2007-2008 financial crises that froze the global economy. This is evident from the negative portfolio transactions in equity and debt securities in the year 2009 and 2010 when foreign investors refrained from any further investments in order to use the capital to recover from a bad situation. However, in 2011 when the companies in Western countries recovered from the financial crisis, they again started investing is South African portfolio comprising of debt securities and equity. The high volumes of portfolio investment inflow in the country of South Africa have been supported by the presence of large local and regional capital markets. Portfolio equity and debt instrument, over the year, has become a very important source of external financing for the country. The South African equity market is considerably larger compared to the average of all the middle-income market/economy. In addition, the equity market in South Africa is highly liquid as far as the value of shares that are traded is concerned (Aron, Leap &Thomas, 2010). Official foreign exchange and gold reserves (World Bank, 2014n; 2014o) As is evident from the graph given above, the foreign exchange and gold reserve of South has increased on a consistent basis since 2007 up until 2012 with minor fluctuations in between. The official foreign exchange and gold reserve of the South Africa is managed and supervised by the country’s central bank which is the South African Reserve Bank. The financial markets division of the bank is primarily responsible for the supervision and management of the foreign exchange and gold reserves incomplete compliance with the criteria set forth in the investment policies and guidelines of the Bank. The reserves managed by the bank play a crucial role in order to ensure that country is able to cover all its external operational requirements, meets the foreign exchange obligations, cover foreign currency net imbalances in the balance of payments and lastly maintain a consistency in the country’s exchange rate as well as the monetary policies (South African Reserve Bank, 2014a). Trends in factor mobility Government Debt to GDP (World Bank, 2014p; 2014q) Government Debt to GDP (Borrowing) The percentage of Government Debt to GDP of South Africa has increased considerably from 32.6% in 2007 to 35.3% in 2011 and thereafter to 38.8% in 2012 with minor fluctuations in between. The decrease in the governmental debt between 2007 and 2009 can be attributed to the fact that during the period of the global financial crisis, the World Bank itself was also suffering from a credit crunch which prohibited it from lending freely and that is reflected in the falling rate governmental debt in South Africa. However since 2009, the governmental debt has increased consistently and has been regarded as a bad sign for the country’s economy because the government is not able to repay its debt. This in the future might hamper the credit rating of the country. Net migration in South Africa (5 year estimates) (World Bank, 2014r; 2014s) Net migration The net migration statistics of South Africa indicate that during the period between 2004 and 2008 there were more than 1 million people who migrated to South Africa in order to extract the benefits from the opportunities that were available in the country. The net migration statistics include both business officials as well as labor. Their presence within the country had a considerable impact in the country’s economy. However, during the period between 2009 and 2013, number of people who emigrated from the country was significantly higher than the number of people who emigrated (represented by a value of -100,000) due to the lack of prospective opportunities. The drastic increase in the amount emigration affected the economy badly. Companies based in South Africa had huge employee turnover during that period and thus they did not have access to adequate labor. This reduced the efficiency of production in number of companies and thus their performance deteriorated in that period. Real Interest Rates in South Africa (World Bank, 2014t; 2014u) Real interest rates (Lending) The real interest rates in South Africa indicate that the country has always encouraged economic growth and development by lending freely to support the SME sector. The government has kept the interest rate at a low level in order to ensure a free flow of money within the economy. This in turn will enable people to borrow at a lesser rate and henceforth use the proceeds for making prospective investments. Exchange rate policy South Africa has a floating exchange rate regime which means that the exchange rate of Rand is measured by the forces of supply and demand in the market for foreign exchange. The Reserve Bank can participate in the foreign exchange market by purchasing or selling foreign currencies. Currently, the policy is to stay out of this market and enable market forces to determine the rate of exchange. Over the last few years, the Reserve Bank has been piling up foreign exchange which in turn has influenced the interest rate significantly (South African Reserve Bank, 2014b). Nominal exchange rate (Source: South African Reserve Bank, 2014c) Nominal exchange rate refers to price of a particualr curency in terms of units of some other currency. The underlying reason behind referring this exchange rate as nominal is because it only measures the numerical exchange value and does not take in to account in other factors such as the purchasing power of the currency. As can be seen from the graph depicted above, the value of Rand with respect to other currencies has depreciated since 2010. Over the last few years the depreciation in the value of currencies in the emerging markets has had a negative impact on the South African economy. Foreign investors have refrained from investing in countries where the value of currency has dropped. As a consequence the countries have restricted their production level to a certain extent. This in turn has also restricted the amount product imported by the countries. South Africa has been a major export destination for the emerging economies. The restrictions imposed on imports in the emerging markets have significantly affected the amount of exports done by South Africa. Real exchange rate trends (World Bank, 2014v; 2014w) Real exchange rate also refers to the price of one currency in terms of units of some other currency. However, unlike nominal exchange rate, real exchange rate incorporates various factors associated with competitive aspect and purchasing power of the currency. This gives the measure a stronger meaning. The real exchange rate is calculated by multiplying the nominal exchange rate with the price indices of both the countries. The price index represents the market price of goods as well as services accounted for inflation. The pattern of the nominal exchange rate and real exchage rate is quite similar. The graph indicates that the value of the Rand increased gradually during the period between 2007 and 2010, which highlights the fact that the country has been able to adopt efficient economic strategies that has strengthened the relative value of its currency. However, since 2010 the value of Rand with respect to dollar has depreciated. This indicates that the purchasing power of Rand has reduced significantly. This also had severe consequences for businesses engaged in international trade and thus impacted the overall economy of South Africa. Crisis South Africa continues to face major political crises over the last few years as a result of numerous union strikes called by gold miners working in various mines throughout the country. The main cause of these strikes is that the worker’s are not satisfied with the facilities that they receive in their work life. According to them, the top level managers rip most of the benefits for the hard work done by the underground miners. The miners have demonstrated their anger against the government’s inadequate measures by calling on strikes repeatedly. The strikes have frequently resulted in violent clashes between the police and the workers. One such example is when 34 miners working at Lonmin mine were shot by police during a strike. Such events hamper the financial performance of the mines and in turn affect the economy of the country significantly (Channel4, 2012). South Africa suffered a massive blow when the country entered recession in May 2009. As a result of that, the GDP growth rate achieved was not up to the expectations of the government. The percentage of exports and imports dropped drastically in that particular time period. The investment, trade, manufacturing and mining sector were severely hit. Despite this major setback, the country was able to recover very well as a result of an active role played by the government. The government committed to bailouts and maintained broad stimulus packages which includes a big investment programmed to improve the public infrastructure. The government also set up training lay off scheme as an element of the national framework response to financial crisis. The government announced the Industrial Policy Action Plan that was aimed towards bringing about enhancement in certain industrial sectors in order to create more number of jobs (Assubji, Luckscheiter and Ben-Zeev, 2009). Conclusion South Africa is a middle income economy, which has shown significant proportion of growth and development over the last few years. The government has adopted efficient strategies in order to enhance the economic prosperity of the country. In spite of that, the country needs to adopt more robust strategies in order to be able to compete in the international arena. They should lower the restrictions in their FDI policy so as to encourage more foreign investors to make investment in the country. The government has to adopt effective strategies in order to ensure the stability of the middle income group and they should strive to bridge the gap between the rich and the poor. The government should increase the interest rate by a certain level in order to prevent unworthy borrowers from borrowing money. This is precisely because the unworthy borrowers might default on their loan at a later period which might hamper the financial performance of the corresponding bank. Due to the rising number of defaulting borrowers, the country’s economy might be negatively affected. The country should maintain the floating exchange rate system because it has served as a strong shock absorber thereby enabling the country to adapt during the strenuous situation of the global financial crisis (STANLIB, 2014). References Aron, J., Leap, J. &Thomas, L. (2010). Foreign Portfolio Investment and Capital Markets in South Africa. Retrieved from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.192.7199&rep=rep1&type=pdf Big Media Publishers. (2014b). Regulations for importers. Retrieved from http://www.southafrica.info/business/trade/import/922450.htm#.UxQKeuOSxe8 Big Media Publishers. (2014a). Key South African import areas. Retrieved from http://www.southafrica.info/business/trade/import/importareas.htm#.UyvWtqiSxe8 Channel4. (2012). South Africas ANC faces major political crisis. Retrieved from http://www.channel4.com/news/south-africas-anc-faces-major-political-crisis Cook, N. (2013). South Africa: Politics, Economy, and U.S. Relations. Retrieved from http://www.fas.org/sgp/crs/row/R43130.pdf Europa. (2013). Countries and regions. Retrieved from http://ec.europa.eu/trade/policy/countries-and-regions/countries/south-africa/ Expatica Communications. (2014). Customs Regulations for South Africa. Retrieved from http://www.expatica.com/za/essentials_moving_to/relocation/Know-Your-Customs-Regulations-For-South-Africa_17155.html Global Alliance of SMEs. (2014). Regulations for Importers. Retrieved from http://www.globalsmes.org/news/index.php?func=detail&detailid=592&catalog=32&lan=en&search_keywords South African Reserve Bank. (2014a). Reserves Management. Retrieved from http://www.resbank.co.za/ReservesManagement/Pages/ReservesManagement-Home.aspx South African Reserve Bank. (2014b). Exchange rate policy. Retrieved from: http://www2.resbank.co.za/internet/Glossary.nsf/0/6e77f482c063ea5742256b430031f732?OpenDocument South African Reserve Bank. (2014c). Historical Exchange Rates (Daily). Retrieved from: http://wwwrs.resbank.co.za/webindicators/ExchangeRateDetail.aspx?DataItem=BOP5376M STANLIB. (2014). IMF Updated View on SA. Retrieved from http://www.stanlib.com/EconomicFocus/Pages/IMFUpdatedViewonSA.aspx Statistics South Africa. (2014). Inflation. Retrieved from http://beta2.statssa.gov.za/?page_id=735&id=3 World Bank. (2014a). South Africa Overview. Retrieved from http://www.worldbank.org/en/country/southafrica/overview World Bank. (2014b). Unemployment, total (% of total labor force). Retrieved from http://data.worldbank.org/indicator/SL.UEM.TOTL.ZS?page=1 World Bank. (2014c). Unemployment, total (% of total labor force). Retrieved from http://data.worldbank.org/indicator/SL.UEM.TOTL.ZS World Bank. (2014d). Current account balance (BoP, current US$). Retrieved from http://data.worldbank.org/indicator/BN.CAB.XOKA.CD?page=1 World Bank. (2014e). Current account balance (BoP, current US$). Retrieved from http://data.worldbank.org/indicator/BN.CAB.XOKA.CD World Bank. (2014f). Exports of goods and services (% of GDP). Retrieved from http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS?page=1 World Bank. (2014g). Exports of goods and services (% of GDP). Retrieved from http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS World Bank. (2014h). Imports of goods and services (% of GDP). Retrieved from http://data.worldbank.org/indicator/NE.IMP.GNFS.ZS?page=1 World Bank. (2014i). Imports of goods and services (% of GDP). Retrieved from http://data.worldbank.org/indicator/NE.IMP.GNFS.ZS World Bank. (2014j). Foreign direct investment, net inflows (BoP, current US$). Retrieved from http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD World Bank. (2014k). Foreign direct investment, net inflows (BoP, current US$). Retrieved from http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?page=1 World Bank. (2014l). Portfolio Investment, net (BoP, current US$). Retrieved from http://data.worldbank.org/indicator/BN.KLT.PTXL.CD?page=1 World Bank. (2014m). Portfolio Investment, net (BoP, current US$). Retrieved from http://data.worldbank.org/indicator/BN.KLT.PTXL.CD World Bank. (2014n). Total reserves (includes gold, current US$). Retrieved from http://data.worldbank.org/indicator/FI.RES.TOTL.CD World Bank. (2014o). Total reserves (includes gold, current US$). Retrieved from http://data.worldbank.org/indicator/FI.RES.TOTL.CD?page=1 World Bank. (2014p). Central government debt, total (% of GDP). Retrieved from http://data.worldbank.org/indicator/GC.DOD.TOTL.GD.ZS/countries World Bank. (2014q). Central government debt, total (% of GDP). Retrieved from http://data.worldbank.org/indicator/GC.DOD.TOTL.GD.ZS/countries?page=1 World Bank. (2014r). Net migration. Retrieved from http://data.worldbank.org/indicator/SM.POP.NETM?page=1 World Bank. (2014s). Net migration. Retrieved from http://data.worldbank.org/indicator/SM.POP.NETM World Bank. (2014t). Real interest rate (%). Retrieved from http://data.worldbank.org/indicator/FR.INR.RINR World Bank. (2014u). Real interest rate (%). Retrieved from http://data.worldbank.org/indicator/FR.INR.RINR?page=1 World Bank. (2014v). Real effective exchange rate index (2005 = 100). Retrieved from http://data.worldbank.org/indicator/PX.REX.REER?page=1 World Bank. (2014w). Real effective exchange rate index (2005 = 100). Retrieved from http://data.worldbank.org/indicator/PX.REX.REER WTO. (2014). Get tariff data. Retrieved from http://www.wto.org/english/tratop_e/tariffs_e/tariff_data_e.htm Assubji, P., Luckscheiter, J. and Ben-Zeev, K., 2009. The global economic crisis and South Africa. Retrieved from http://www.za.boell.org/downloads/Perspectives_3-09.pdf Read More