SA economy in third place

SOUTH Africa, thought to be the continent’s number one economy until early 2014 when Nigeria rebased its Gross Domestic Product (GDP), must now give up its short-lived No. 2 spot to Egypt, according to a report by professional services company KPMG.

Financial Matters Dana Sanchez

The decline in value of the Rand may be just a short-term aberration which we might regret considering the opportunities we have thrown out had we allowed it to remain in circulation.
The decline in value of the Rand may be just a short-term aberration which we might regret considering the opportunities we have thrown out had we allowed it to remain in circulation.

The South African economy is expected to grow by 0,6% in 2016, and is now the third-largest economy on the continent behind Nigeria and Egypt, according to the International Monetary Fund World Economic Outlook released in mid-April, KPMG reported.

Netherlands-based KPMG is considered one of the world’s “Big Four” auditors along with Deloitte, EY and PwC.

Developed economy

The KPMG report is not exactly a surprise. In October, economic analysis from Moscow-based investment bank Renaissance Capital (RenCap) said that South Africa may lose its place as the second biggest economy in Africa, BusinessTech reported.

Based on exchange rates, South Africa won’t be able to retake the continent’s second-place position anytime soon, said United Kingdom-based research firm Business Monitor International.

South Africa is still the continent’s most developed economy and has a more diversified economic base than Egypt, but its fall from first and second place, among the continent’s giants, is of great concern, especially since it’s attributed mostly to weakness in the rand as a result of domestic issues, wrote Christie Viljoen, financial risk manager at KPMG in South Africa.

Falling rand

When Nigeria rebased its economy two years ago, the statistics showed that the oil-dependent economy was almost twice the size everyone thought. Improved measurement of the informal economy, the inclusion of 13 more industries and changes in measurement methodology contributed to the rebasing.

In hindsight, it’s now believed the Nigerian GDP in US dollar terms bypassed South Africa in 2011. By the end of 2015, Nigeria’s GDP was measured at US$490 billion compared to South Africa’s US$313 billion, KPMG reported.
The rand weakened from an average of R8,20 per US dollar in 2012 to an average of R12,74 per US dollar in 2015 — more than 50% depreciation. As a result, the nominal US dollar value of South Africa’s GDP declined by an average of almost 7% per year over the past four years.

However, in mid-week trading, the rand backtracked on Wednesday after firming to R15,50 to the greenback. The South African unit was hard hit by last weekend reports that Finance minister Pravin Gordhan faced imminent arrest, ticked stronger as the rumours ran out of steam, but lost ground again as the country’s political squabbles continued in the country’s parliament. By Wednesday morning, the rand had breached its recent lows to trade 1,28% weaker at R15,74 to the greenback from a close of R15,53 in New York.

Egypt now No. 2

Meanwhile, Egypt’s nominal US dollar GDP expanded by an average of 7,5% per year during 2012-2015. The Egyptian pound’s depreciation during that time was slower than the rand’s.

Since early in 2011, the Central Bank of Egypt has tightly managed the pound, resulting in a milder depreciation compared to the free-floating South African currency. This contributed to Egyptian GDP eclipsing South Africa’s during 2015, according to KPMG: “Were it not for the rand’s slump, South Africa would not have surrendered its second place during 2015.”

The Egyptian pound is one of the continent’s most over-valued currencies, while the rand is the most under-valued, according to analysis by RenCap.

The figures from RenCap are revised and took into account real GDP growth, inflation and movements in exchange rates. The latter had the biggest impact, BusinessTech reported. — afkinsider.