SOUTH Africa’s economy is suffering from an identity crisis. Not only is the country part of the Brics (Brazil, Russia, India, China and South Africa) group, but simultaneously, it is also part of the much pitied “Fragile Five” countries most vulnerable to “quantitive easing”.
The other members of this group are Brazil, India, Indonesia and Turkey. This week, the Financial Times and Schroders added Hungary, Chile and Poland to the Fragile Five. It became the Fragile Eight.
Being part of the Brics group is obviously good for South Africa. But, being part of the so-called Fragile Five or Fragile Eight means it is vulnerable to quantitative easing, which was the US Federal Reserve’s policy of buying bonds to provide a way of propping up the faltering global economy.
The US’s rise is the Fragile Fives’s loss. And it could be quite a knock indeed.
This week, the World Bank warned that financial flows to some emerging markets could fall by as much as 80%if tapering is done in a disorderly way. So, to counter this risk, South Africa and other emerging markets need to ensure that tapering is done in an orderly and well-coordinated manner.
It must take into account broader global ramifications than simply narrow US economic interests alone.
That will not be easy.
The fear, according to Craig Botham, Schroders’s emerging market economist, “is of a sudden stop where capital flows halt or even reverse”.
Our rand, the Indian rupee, the Brazilian real, the Turkish lira and the Indonesian rupiah have been severely hammered by indications that the Federal Reserve is likely to end its quantitative easing programme as the domestic economic fundamentals in the US improve.
Of course, this is a sign that the global economic balance of power has shifted back to the developed economies of North America, Europe and Japan, and away from the emerging markets.
The US is set to expand its economy by about 3% this year. China and other emerging markets will continue to grow, but at reduced rates.
This has happened because the US has sorted out its banks, turned around its manufacturing and made good progress with shale gas (fracking), which is having positive economic spin-offs for that economy.
The Economist magazine says that this year “America’s contribution to global growth is likely to be bigger than China’s -for only the second time in eight years. It will be decades before China’s income per head (only $11,000 in 2014) … matches America’s ($55,000).”
You can see this changing global power dynamic in many ways.
In 2009, four of the world’s 10 biggest companies were Chinese and only three were American. By the end of last year, nine of the 10 biggest companies were American and only one, PetroChina, was Chinese.
In contrast, emerging markets have new worries, such as a potential banking crisis from the scourge of unsecured lending — something to which South Africa is painfully exposed.
The implications of this economic rebalancing need to be rigorously scrutinised and taken into account in South Africa’s national strategic planning process.
Investors are changing their habits too.
In recent years, investors and countries (including South Africa) have been looking east, and rightfully so.
But this is changing, and South Africa’s strategists need to take this new focus into account when they plan how to increase growth, create decent jobs and alleviate poverty.
As painful as it might be, South Africa may also need to reassess its loyalties.
South Africa’s Brics partners are its friends when it suits them, but they are also fierce competitors when it suits them.
Clearly, South Africa will still need to collaborate with them when it benefits its national economic interest, but the country also needs to be prepared to fiercely compete with them when national commercial interests are threatened.
To do anything else would be naive.
As the British diplomat and former prime minister Lord Palmerston said in 1841: “Countries don’t have permanent friends. They have permanent interests.” But a legitimate question is: Can South Africa really hope to influence the swings of global capital owing to tapering?
Well, no. But what it can do is mitigate the fallout so that it comes out, if not unscathed, then pretty strong.
First, we need to strengthen our domestic economic base.
South Africa cannot have its economic fortunes perpetually and largely depending on fickle short-term capital inflows into portfolio investments. It needs a very firm, unshakable and sustainable domestic economic base underpinned by massive local and foreign direct investment, for the long term.
Second, the build-up to the national elections in the next few months should be used as an opportunity to reassure investors about the robustness and soundness of South Africa’s economic fundamentals.
Most of the Fragile Five are having elections this year, and foreign investors are wary of the risk of populist tendencies emerging to woo voters.
We should avoid that.
Third, emerging markets such as South Africa’s need to make clear to the world just how the Federal Reserve’s actions make countries like it vulnerable. The best chance of doing this is at the Davos World Economic Forum, which is being held from Wednesday until Saturday. That is where South Africans can make the global powers aware of its views.
Last, South Africa needs to be proactive in shaping its own economic destiny as it attempts to derisk the economy from the adverse effects of global forces beyond its control. This requires cushioning mechanisms and a determined effort to consolidate its position as the pre-eminent mover in the rising African economic landscape.
When it comes to Africa, South Africa should not cede leadership to China, Brazil and Russia.
If it cannot lead in Africa, where can it take the reins?