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ECONOMY: Hope for SA’s Economic Prospects Beyond the World Cup

 





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While there are clear indications that the 2010 FIFA World Cup brought immediate and visible benefits to SA, other domestic and global economic data suggests that SA may be looking in much better shape relative to its developed market counterparts with regard to fiscal sustainability and potential growth.

As a consequence, taxes in SA will most likely be much more favourable than taxes on savings/wealth and income in the developed world, and SA might be a more attractive destination for funds than developed markets.

This is the view of Madalet Sessions, senior analyst at BoE Private Clients, who says that, ultimately, the sustainability of the economic recovery will depend upon a number of factors, of which growth in Household Consumption Expenditure (HCE) is an essential component.

In this context, Sessions notes that the growth in first quarter HCE, as per the recent SA Reserve Bank’s (SARB) Quarterly Bulletin, came as a surprise to most market participants.

“Consumption of durables (mostly vehicle sales), semi-durables (predominantly clothing and footwear), and non-durables (food, beverages and tobacco) recorded seasonally adjusted growth rates quarter on quarter of 16.8%, 28.4% and 9.5%, respectively. These surprisingly healthy HCE growth rates must surely have been a factor behind the recent decision of the SARB’s Monetary Policy Committee not to provide further rate cuts,” she says.

“While one should be wary of reading too much into this one data point, continued recovery and growth in household wealth would certainly be cause for much more optimism about the prospects for the SA economy. What is clear is that the SA economy cannot achieve robust growth without the household sector, which contributes between 60% and 65% to SA’s GDP.”

With regard to the country’s current account deficit - which widened more than expected from 2.9% of GDP to 4.6% of GDP during the first quarter - Sessions says that this represents SA’s growth opportunity.

“By borrowing offshore to finance the fiscal deficit, the economy’s growth is not constrained by the lack of domestic savings. Had we not had access to foreign savings, long-term interest rates in SA would have had to rise to encourage the domestic economy to increase its savings. This would almost definitely have resulted in a far more rapid and sustained decline in private sector investment and consumption expenditure.

“The fact that SA could borrow from abroad eased the required adjustment in interest rates and output,” she argues.

Looking specifically at the benefits of the World Cup, Session notes that the Department of Home Affairs’ foreign visitor numbers for June 2010 were not only significantly higher than both 2008 and 2009 June (traditionally quiet months for SA’s tourist industry), but that the 1 020 321 travellers that arrived in SA during the month represents the largest number of foreign arrivals that has ever arrived in SA in any given month.


“Our rough approximation of monthly tourist expenditure indicates that aggregate spending by foreigners in June, and indeed in the first quarter of 2010, was much higher than in previous years. Over and above that, when one looks at source countries, it is apparent that two new arrivals – Brazil and Mexico - not previously on the list of top ten visitor countries in terms of spending, made it to numbers 4 and 7, while Australia - traditionally found in the bottom half of the table - found itself at number 3,” she says.

“Should these tourists enjoy their experience here, and leave SA as unwitting ambassadors, we could see a step change in travellers from these countries.

“While the World Cup clearly had a positive effect on SA as a tourist destination, Household Consumption Expenditure and the widening current account deficit during the first quarter are also positive for the prospects of recovery in the domestic economy.

“Relative to developed markets, these positive prospects, when combined with comparatively favourable fiscal outlook, means that SA might become a much more attractive destination for funds than developed markets, bearing in mind always the importance of diversifying wealth both geographically as well as across asset classes,” she concludes.

 
 
 
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