SA companies urged to take the gap in China

30 August 2015 - 02:04 By ASHA SPECKMAN and ANN CROTTY

The tantrum experienced in global markets during the past week over growth concerns in the world's second-biggest economy, China, has raised questions about South Africa and sub-Saharan Africa's short- to medium-term prospects. Africa and Latin America's largest economies have been supported by China's insatiable demand for raw materials since the 2008 global recession, when Western economies went into hibernation. That demand has since waned in line with a shifting focus to domestic growth versus export growth in the economy of the Asian giant.On Friday, data showed Brazil had slipped into recession, in a week where Statistics SA said the local economy contracted by 1.3% in the second quarter.Countries in west, central and southern Africa, dependent on extractive industries including oil, are under pressure.story_article_left1South African corporates have been rushing into the rest of the continent during the past few years as the local economy has been an underperformer in the region because of labour strife and energy shortages."Many of these countries remain structurally unprepared for an environment of low international commodity prices," Jacques Nel, an economist at NKC African Economics, said this week."The drop in commodity prices should reinvigorate reform efforts, but for many countries their economies will be severely affected before any structural adjustments are realised."West African giant and Africa's largest economy, Nigeria, is expected to struggle to maintain its currency pegs because of lower crude prices.Oil, which provides almost 70% of Nigeria's government revenues, has plunged almost 84% since June last year.Nigeria's naira has in turn weakened over 18% against the dollar during the past 12 months. The rand has weakened nearly 17% in the same time.block_quotes_start We have some great internationalised businesses but far too many of our companies haven't tried to grow in China block_quotes_endEarlier this month, cellular operator MTN reported an earnings decline in its first half because of the weaker naira, among other factors.Low prices will drag on foreign direct investment and economic growth; so projects risked delay, while market expectations for currency devaluations will hurt the balance of payments, according to a note from NKC African Economics.The implications of competitive devaluation include higher inflation and interest rate s at the cost of growth potential."Although we think that commodity prices have reached about 80%-90% of the bear run, volatility will increase and commodity prices will likely stay lower for longer," Bart Stemmet, another economist at NKC African Economics, said.The World Bank estimates gross domestic product growth in sub-Saharan Africa will slow to 4.2% this year from an average of 6.4% from 2002 to 2008.But China's shift from exports to consumption and an innovation-fuelled economy during the next decade need not be detrimental to growth in sub-Saharan Africa."We have some great internationalised businesses but far too many of our companies haven't tried to grow in China," Kobus van der Wath, a consultant at The Beijing Axis, said at this week's Forum on China-Africa Cooperation conference.Apart from tourism there were opportunities in education, health services and agro processing, he said."This [China] is a $10-trillion economy growing around 6% a year. It will continue to need a lot of raw material imports but African CEOs must start to look at other sectors."Van der Wath said Chinese investment in Africa was far from over."It's ahead of us. The Chinese have not invested much yet."Between 2001 and 2013 China's imports from across the globe increased from $244-billion a year to just under $2-trillion. Africa's share went from a barely noticeable $4.8-billion to $117.5-billion in that time.story_article_right2Within Africa, South Africa was the strongest performer, with exports to China increasing from a mere $1.2-billion to $48.4-billion.Currently, the main sources of Chinese imports, said Ron Sandrey of the Tralac Trade Law Centre, were the EU, South Korea, Japan and the US. The EU's share had dropped from 15% to 11.3% while Africa's contribution was up from 2% to 6% and South Africa's from 0.5% to 2.5%.Over the same period African exports to the US dropped sharply, Sandrey pointed out. More recent African export data to China and the rest of the world would reflect the devastating impact of the slump in oil and other commodity prices.East African countries such as Kenya are relatively unscathed thanks to their diversified economies. They will be affected by global market sentiment, but these economies will be more resilient, according to analysts.On the global panic over turmoil in Chinese equity and currency markets, He Wenping of the Chinese Academy of Social Sciences, wasn't fazed."There's always talk of a crisis [in the West] that will end China's development - now it is because of the stock market and predictions of an economic slowdown."She acknowledged many of China's provinces had reported lower economic growth : "This is the transition from fast to moderate growth. We are in good shape."Van der Wath said China needed to grow more slowly. If the government tried to lift growth above 6.5% over fears of political instability, he would be concerned. "The economy's structural integrity would be at risk".speckmana@sundaytimes.co.za, crottya@sundaytimes.co.za..

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