Others: South Africa can be a $750 billion economy by 2025

Zexit has revived hopes for the recovery of the South African economy from its recent morass. As President Ramaphosa starts off with his initial policies, it is imperative to draw up a blueprint for long-term economic growth.

If South Africa wants to grow its economy from the current ~$350-billion (around R4.12-trillion) to $750-billion (-R8.83-trillion) by 2025, it would have to target a stellar 10 percent compound annual growth rate (CAGR).

That sounds daunting, but many nations have achieved decadal double-digit growth in the initial years of their journey. Even India’s Maharashtra state recently announced a vision to grow its economy by 15 percent CAGR till 2025. A high, yet achievable target pushes the commitment from politicians to realise the economic agenda.

But to what extent should South Africa focus on each growth-driver to realise this target? This is what we explore here.

Industry sector

Approximately 30 percent of South Africa’s GDP is estimated from industry, in line with the average ~30-35 percent in most large emerging markets. So if its industry has to maintain itself in this ~30-35 percent proportion, it would have to grow at a 12 percent CAGR; slightly higher than the estimated GDP growth. South Africa’s gross investment at ~20 percent of GDP has far lagged the ~35-40 percent seen in China, Malaysia and Thailand in their initial years of industrialisation. If South Africa intends to push investment to ~35 percent of GDP to drive capacity addition, its investment has to grow at an 18 percent CAGR to make up for its lag. Investment also correlates with productive imports like machinery.

In South Africa, import comprises ~27 percent of GDP, which is more than the ~20 percent share of investment in the economy. But recent industrialising nations have seen that their share of imports are ~50-60 percent of their share of investment. This means part of South Africa’s imports may have been for a non-productive purpose not contributing to investment. That portion has to reduce. So if import grows at only 7 percent CAGR, its share can dip to 21 percent of GDP by 2025 (i.e. 60 percent of the share of investment, estimated at 35 percent of GDP).

Where should investments go? South Africa needs mass-market affordable housing, urban infrastructure, economic corridors that connect the cities/ports with the underdeveloped regions for inclusive growth across districts, etc. But it also means addressing the “Ease of Doing Business” parameters, where it has lost rank by 41 places since 2014.

Agriculture sector

Only ~2 percent of South Africa’s GDP is estimated to come from agriculture, which is far less than the 7-10 percent share seen in most large emerging markets. This is another big opportunity for South Africa’s future, apart from industry or infrastructure. Farm exports to the African continent and beyond can be a key driver of growth. If the economy were to increase agriculture’s share to 7.5 percent by 2025, it would grow at a stellar 30 percent CAGR.

So some of the incremental investments mentioned in the previous section have to correlate with the agro-sector. But the crux here is to improve output through farm productivity, as agriculture employs only ~6 percent of the South African workforce. For this, it has to invest in mechanisation and market linkages to improve yields and ensure everyone gets the correct price until the last mile.

Services sector

Around 69 percent of South Africa’s GDP is estimated to come from services; mainly tourism and banking, financial services and insurance (BFSI). This is on the higher side, in comparison to the average ~60-70 percent seen in most large emerging markets. Services cannot grow in isolation beyond a point; since most services are centred around manufacturing or infrastructure development. So if those sectors have to grow faster in the pie, the share of services may dip to the global average. Say if services have to make up ~60 percent of South Africa’s GDP by 2025, it would have to grow at a moderate 8 percent CAGR, less than the 10 percent estimated GDP growth.

While tourism and financial inclusion remain priorities, deepening the services sector through the digital economy would bring in efficiencies in public-services delivery to the broad base of the population. It would also make it easier to catch corruption than a cash-based economy. It should include improving the quality and reach of universities and skill centres to improve employment prospects. All these would expand its addressable consumer base, a key necessity in a country where income and wealth concentration is acute.

Export sector

Only ~27 percent of South Africa’s GDP comes from export. The export sector has to grow at a 10 percent CAGR till 2025 in line with estimated GDP growth if it has to meet the forex demand for imports and keep trade balance positive. The issue is that the last year’s trend in the ZAR vs the USD may have reduced the competitiveness of South African export in the international market, but this makes it imperative to draw up further Free Trade Agreements and export-promotion schemes with the continent and beyond to open more export opportunities.

Consumption sector

South Africa has a high share of private consumption-to-GDP – 81 percent vs ~60 percent in large emerging markets. Part of the reason for South Africa’s high consumption is its large share of government consumption vs peers, and this flab has to reduce.

China and Indonesia have a similar per-capita, but they spend less and save more. South Africa needs to double its savings rate from ~16 percent to 30 percent+, to minimise dependence on foreign borrowings to fund investments, since that could reduce the fiscal elbow room to sustain investments at the scale it needs.

All in all,these segmental estimates to target a GDP of R8.83-trillion by 2025 may sound over-ambitious at this point. However, Zexit has given an opportunity to institutionalise the changes needed for long-term growth. If specific growth drivers like gross investment, productive imports, agro-export, digital services and savings are given the extent of push as described here, the target may well be achievable.

Image Courtesy: FroYo_92/ Getty Images & HuffPost SA

Originally published here – http://www.huffingtonpost.co.za/sourajit-aiyer/heres-how-south-africa-can-become-an-r8-8-trillion-economy-by-2025_a_23381175/

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