South Africa: the quest to rediscover sound fiscal policy

South Africa’s fiscal struggles have been well documented since it lost the leadership of President F.W. De Klerk and Nelson Mandela, but the country’s resilience is leading it to alternative financial products, explains FXTM’s Nikola Grozdanovic…

South Africa is undoubtedly one of the most unique countries on the African Continent. Its economy has been forged by massively rich mineral resources and while decidedly African, it has strong first world influences. Its apartheid government was set on a transformative course after President F.W. De Klerk and Nelson Mandela made history, and the country thrived under the new rainbow flag and a brand new constitution. The currency was strong and fiscal policies and structures were sound. Sadly, after Mandela stepped down, the country has had numerous leadership and fiscal challenges.

Strengthening infrastructure

One area that has been particularly hampered is infrastructure development. While relatively advanced considering the limitations, the pace of growth needed to meet the demands of urban development, is nowhere near what it should be. Energy supply, road and rail networks and communication infrastructure are all behind the curve and as a consequence, the cost of production and roll out of services has been driven higher. South Africa has lost much of its international competitiveness and this has put a damper on fixed investment by private companies. In spite of this, it is well known that the country is more than capable of producing high quality goods and services. They have been strong innovators in the mining, fuel, banking and technology spaces – all they need to grow to the next level is a stable fiscal strategy and a focus on solid infrastructure development.

The South African Reserve Bank estimates that with current economic infrastructure, the economy’s potential for growth is probably capped at around 3.5%, a figure well below what is needed to address the 26% unemployment rate and widespread poverty.

A strong focus on infrastructure projects would have an enormous impact on foreign perceptions of risk in South Africa. Inconsistent foreign capital inflows into the local equity and bond markets, combined with a highly volatile currency, has highlighted the fact that investors are growing increasingly concerned about the country’s stagnating economy and tumultuous politics.

Once a country is on a faster growth rate, it attracts foreign direct investment. A strong and stable middle class is also vital for a country’s economy, and South Africa’s middle class growth is a good news story. The South African black middle class has more than trebled over the past 12 years, and this year it has neared 6 million people. According to University of Cape Town marketing professor, John Simpson: “The black middle class is keeping the economy alive.”

The black middle class

The factors driving the increase in the black middle class include greater access to credit, improved education levels, and BEE. Since 2004, the number of black middle class members with a tertiary qualification has grown by more than 2 million, internet usage has increased to 67% and cellphone ownership has moved from 36% in 2004 to 97%. In fact, the middle class is growing across the entire African continent. According to a report from the African Development Bank, the middle classes have tripled over the last 30 years to 313 million – a number equal to 34% of the continent’s population.

Although the middle class is increasing, wealth distribution in South Africa is still massively disproportionate. 10% of the population earns around 55-60% of all income, compared to only 20-35% in more established economies. Even more alarming is the fact that recent surveys show that 10% of the South African population owns at least 90–95% of all assets (property, pension funds, and equities) compared to 50-75% in established economies. South Africa also has a high proportion of citizens that are unbanked (23%) which also hinders the growth of both the country and its citizens.

Studies suggest that high wealth inequality can have negative political and economic consequences, which is why South African policymakers and large corporates are spending significant resources addressing it. There are many initiatives focusing on inequality of income and consumption, since these issues are closely linked to poverty and exclusion.

The alternative

South Africans are, however, resilient and resourceful, and owing to the fact that many of them had no access to formal banking, due to (amongst other things) demographics, logistics and affordability, they formed alternative ways to invest, namely Stokvels. These vehicles are in essence savings or investment societies to which members regularly contribute an agreed amount and from which they receive a lump sum payment for an event, or long term objective. There are over 800 Stokvel associations in South Africa with a reported value of r50 billion rand.

The exclusion of many South Africans from traditional financial products in the past, can perhaps explain why they have taken to forex trading like ducks to water. The numbers of individuals registering to trade is increasing substantially. This growth prompted FXTM to apply to the Financial Services Board (FSB) of South Africa for a Financial Services Provider (FSP) license in 2016, which was granted. While South Africans are very open to alternative forms of investing, education plays a critical role in determining how successful they are. Even with Stokvels, there is an element of risk because they often fall outside of the regulatory framework. Banks have been trying hard to formalise Stokvels to assist investors to put checks and balances in place, and their efforts so far have been met with a degree of success.

In order to help traders get familiar with the tools and strategies to trade currencies, FXTM ran a series of workshops and seminars in Johannesburg and Durban in May this year. The training was well received and the level of knowledge displayed by the traders was impressive, especially since FX trading is a relatively new practice in South Africa.

FXTM believes that with the right training and support, the new kids on the block should be able to master the intricacies of trading. Amid South Africa’s turmoil, there is without doubt an ‘Africa Rising’ theme. Given more time, prudent regulatory controls, inspired leadership, and wider access to financial products, South Africa is set to take the podium as one of the leading countries in Africa.

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