South Africa closed 2008 with cause for quiet optimism on a number of fronts. Year-end inflation was continuing to recede, interest rates were cut for the first time in 18 months and the country's banking sector showed signs of having weathered the worst of the international credit crisis.
That is not to say that the South African economy was unaffected by the global downturn; indeed some sectors are proving rather sensitive to the slowdown. Falling commodity prices, especially for some of the country's main exports such as coal and precious minerals, are negatively impacting foreign earnings, while unemployment remains stubbornly high and growth slows. However, there are a few silver linings, including the fact that the international credit crunch could arguably help the government to achieve some of its long-stated objectives, by taking some of the heat out of consumer demand, reducing household debt levels and further pushing down inflation.
According to a World Bank report issued at the end of December, South Africa's economy expanded by 3.4% in 2008, its lowest rate in a decade and well down on the 5.1% of the previous year. While this slowdown will spill over into 2009, with the World Bank forecasting a growth rate of less than 3%, this more modest performance still means South Africa will avoid falling into recession, a fate which has befallen many of its major trading partners.
Another positive for the South African economy was the easing of inflation in the closing months of the year. Having peaked at 13.6% in August, well over the upper target of 6% projected by the central bank, consumer inflation fell back to 12.1% in November.
This drop in prices was one of the reasons cited by the Reserve Bank for cutting interest rates by 50 basis points on December 11 to 11.5%. The bank had pursued a policy of rate increases - from 7% in June 2006 to a high of 12% late last year - to try and reduce consumer demand, which had fueled household debt levels and inflation.
Announcing the cut, Reserve Bank Governor Tito Mboweni said the bank's monetary policy committee had revised its timetable for when inflation would return to the projected target range to the third quarter of 2009, bringing forward its schedule from the second quarter of 2010.
One of the biggest factors behind the rising inflation was the increased cost of imported oil. Between January and October, oil accounted for more than 20% of the country's import bill, according to figures released by the Reserve Bank on December 9. However, this figure is expected to decline following the retreat of international oil prices from their record high $147 in July, with the benefits to be passed on to consumers in the new year. On January 1, the Department of Minerals and Energy announced an 18% cut in fuel prices, taking the cost for petrol at the pumps to their lowest level since March 2007.
Despite falling oil prices, South Africa still has to contend with a wide trade deficit, partly due to the fall in precious metals exports, which fell by 30% in November. According to a report issued by the South African Revenue Service at the beginning of 2009, the trade deficit for the first 11 months of 2008 was $9bn, compared to $7.3bn for the same period in 2007.
In a bid to maintain its GDP growth, South Africa has dramatically increased public spending, injecting massive amounts of funds into the economy. The country's Keynesian programmes, which direct funding to big ticket items such as the Eskom upgrade and transport infrastructure, will stimulate the national economy in years to come, but have also, pushed the state budget further into the red. The country's budgetary shortfall stood at $4.3bn for the first eight months of the fiscal year, more than double the $1.85bn deficit in the same period in 2007.
Conversely, this increased spending could also help reduce the country's unemployment queues, which remain frustratingly high. The volume of registered unemployed reached 23.2% of the workforce at the end of October according to Statistics SA, equating to 4.12m people being jobless.
Despite harder times for the global finance industry, South Africa's banks continue to perform well, according to the 2007 annual report by the Reserve Bank's Bank Supervision Department. The report, released in July, said the banks were well capitalised at 12,8% in December 2007, and that the banking sector's assets increased from $281bn at the end of December 2006 to $344bn at the end of December 2007, representing an annual growth rate of 22.7%. Profitability also remained strong in the year under review. The net income of South Africa's banks rose by 20.6% during 2007, reaching $4.25bn at the end of December 2007.
Though affected by the tightening credit situation around the world, South Africa's banks have largely managed to stay clear of the worst of the meltdown, mainly due to their limited exposure to toxic loan instruments.
A report issued by the Reserve Bank's Bank Supervision Department at the end of July, said that South African banks had not been directly impacted by the subprime crisis and the industry's high capital adequacy ratio, which it put at 12.5%, meant the sector was protected against the worst of the financial downturn.
That said, the report did warn that increasing levels of non-performing loans - which totaled $7.4bn as of the end of May- compared to the $3.93bn at close of 2007, could trouble the sector in the future, though the easing of interest rates late in the year could reduce this risk.
2008 did prove rather challenging for South Africa's energy sector, with the country being hit by a series of power cuts in the first months of the year as demand for electricity overwhelmed state energy provider Eskom's capacity. The utility was forced to institute a series of rolling blackouts and reductions across the country, causing temporary shutdowns and depressing output in some of South Africa's key industries, including the energy-dependent mining sector.
In response to the shortage, Eskom unveiled a massive five-year $42bn investment programme. However, the first of these projects - which include both new power stations and upgrades to existing facilities - is not due to come on line until 2013. As a result, to bridge the supply gap, Eskom announced in April it would reopen two decommissioned coal fired power stations and step up electricity imports from Mozambique.
Though perhaps not good news for sellers or investors, potential buyers would have been heartened by a report released at the beginning of the new year, which stated that residential property price increases had slowed in 2008. The study by First National Bank showed that the retail cost of housing rose by 5.2% last year, less than half the 11.2% in 2007 and well off the 29.5% increase recorded in 2004.
While 2008 may not have been the best of times for the South African economy, it certainly wasn't the worst of times either. Though the coming year will also bring hardships, these will be compensated to a degree by further falls in inflation, which will have a flow on effect across the economy.
