The weakest economies are dropping like flies. Will Poland defend itself?

05.09.2018 17:53|Marcin Lipka

After Venezuela, Turkey, Argentina and Brazil, South Africa joined the group of countries threatened by serious perturbation and entered recession. There is also a growing risk that these problems will shift to other, more stable regions of the world. Poland may not be excluded," writes Marcin Lipka, Conotoxia Senior Analyst.

South Africa is plagued by a double budget deficit and current account deficit. In both cases, it amounts to almost 4% of GDP, which suggests that the country needs a lot of external financing and is not able to hold themselves in check on expenditure.

Foreign financing can generally take the form of direct investment (FDI) or portfolio investment. The former is more beneficial because it usually binds the investor more closely to the country, creates jobs and increases competitiveness. The latter, on the other hand, practically only responds to the current demand for hard currencies and capital and it’s a response to the symptoms of problems rather than treating the cause.

Unfortunately, according to IMF data (2018 Article IV Consultations), FDI in South Africa was negative (minus 1.5% of GDP in 2017) in the last four years. This means that the deficit was financed with portfolio capital, which is sensitive to the economic situation.

Initially, investors were keen to lend capital to South Africa due to positive political changes. Cyril Ramaphosa became president, replacing Jacob Zuma - a populist accused of corruption. However, investors quickly saw that changes of cabinet or new faces in state-owned companies were a drop in the ocean for the unstable South African economy.

Tragic labour market and education level

South Africa's economy depends to a large extent on the extraction of industrial and precious metals and coal (about 50% of exports). However, mines are relatively inefficient due to electricity problems. Poor working conditions and low wages often generate repeated strikes. The country is also heavily dependent on agriculture. It was the poor condition of this sector that brought South Africa into recession in the second quarter of this year.

The labour market in South Africa is also disastrous. The percentage of employees in relation to the working age population (15-64) is only 43.5%, which is the lowest of more than 40 OECD countries (the OECD average is 68.2%, while in Poland it is 66.9%). Almost one third of young people in South Africa do not work, study or participate in courses.

Students’ results also look dramatic in South Africa. IMF data shows that results from mathematics (TIMMS math score) below 400 points are reached by as much as 65% of respondents, while in Korea or Japan practically no one scores such a small number of points, and in Italy or Australia the lowest results are achieved by less than 10% of the studied population.

Tragic results in education are not only the result of overcrowded classes or infrastructural deficiencies. "The Economist" in the article "South Africa has one of the world's worst education systems" pointed out that a decade ago, 79% of teachers achieved results in mathematical tests below the level expected for 11-12 year olds.

A case from more than 100 years ago is back

For the last quarter of a century (since the fall of Apartheid), South Africa has not been able to build sufficiently strong institutions either. From time to time, the country is shaken by corruption scandals and assets in the form of state-owned companies are poorly managed and generate the risk of an increase in national debt, if they are actually nationalised (energy companies, post office, etc.).

In recent weeks, the issue of land ownership in South Africa has also returned with twice the strength. The issue of colonizers who took over the land from South Africans in 1913 has still not been fully settled. Although since the end of Apartheid, part of the land has been returned to its rightful owners and compensation has been paid for the seized land, the issue is still arousing great emotions.

Recently, the issue has made headlines in the foreign financial press due to plans to expropriate landowners without compensation. Although this is to apply only to land that is not cultivated, the weak institutions and the risk of the more populist wing of the ANC (the African National Congress, which has formally been in power since 1994 in South Africa) returning to power, has significantly increased entrepreneurs’ concerns.

Emerging economies on thin ice

Given South Africa's structural weaknesses, it is not surprising that the country was the first to fall in the claws of recession. Latin America can also be seen as an isolated region with a number of problems. The issue of Turkey can also be seen as the result of the disastrous economic policy of President Erdogan's team.

However over time, the problems of several hundred million people from countries in crisis will translate into a reduction in consumption and profits for global companies. The appetite for investments in other, more stable countries will also decrease. In addition, the spectre of a trade war with the USA (not only directly with China) continues to weigh on many economies, which increases the risks for businesses.

It would be misleading to think that the growing external turbulence will not affect the economic situation in Poland. The only unknown factor is the impact scale of these problems. It can only be about a decrease in development to a potential level, about 3.5% in 2019. However, it may also result in a much deeper decrease in the growth rate, if entrepreneurs and consumers in the world become scared of the rate at which the weakest links fall off.


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