ANALYSIS

South Africa still has a large trade and investment deficit with the other BRICs

By Peter Fabricius 29 July 2018

China's President Xi Jinping (2-L) India Prime Minister Narendra Modi (L) South Africa's President Cyril Ramaphosa (C), Brazil President Michel Temer (R) and President Vladimir Putin (2-R), during the BRICS Summit 'family photo' held in Johannesburg, South Africa, 26 July 2018. EPA-EFE/MIKE HTUCHINGS / POOL

Attempts by South Africa to rebalance its economic relations with the other four BRICS member states don’t seem to be bearing much fruit.

The 10th BRICS summit ended last week in Sandton with the 106-point Johannesburg Declaration. Just about everything was in there, from jointly fighting terrorism, through bolstering and democratising the international political and economic order, to increasing sporting events among the five member nations. The latter decision, incidentally, being at the behest of Russian President Vladimir Putin, clearly the most athletic of the five BRICS leaders.

Though much of the declaration was rhetorical, there was some potential concrete benefit for South Africa, the last and smallest nation to join the much bigger nations in BRICS – Brazil, Russia, India and China.

One of the most concrete benefits was the decision of the five BRICS leaders present – Putin, China’s Xi Jinping, India’s Narendra Modi, Brazil’s Michel Temer and South Africa’s Cyril Ramaphosa – to establish a BRICS vaccine research and development centre. The declaration did not say so, but Ramaphosa announced at the end of the summit that the centre would be established in South Africa.

And, as the smallest member and the only one from Africa – or indeed from any developing (rather than emerging) state – South Africa derives prestige from merely basking in the glory reflected from the bigger nations.

In more practical terms, though, South Africa joined BRICS to improve its economy so as to help achieve its triple economic aims of reducing poverty, unemployment and equality.

Has that happened? The picture is mixed. The BRICS New Development Bank (NDB) which began operations in 2016 has issued 23 loans, two of which have been to South Africa. The first, issued in 2016, was for $180-million to Eskom to connect independent renewable energy power plants through transmission lines to the national grid – which is expected to increase Eskom’s capacity by 670 MW and to avoid 1.3m tonnes off CO2 emissions per year. The loan was not immediately taken up, in part it seems because the then corrupt state energy utility had stopped buying renewable energy in favour of a suspect plan to build a fleet of nuclear power plants. But Eskom and other officials have given the assurance that it will be taken up.

In 2018 the NDB gave a second loan of $200-million to the South African government to finance the reconstruction of the Durban container terminal berth.

In 2017 the NDB committed to lend US$1.5-billion over 18 months for South Africa’s development projects as it launched the bank’s first regional office, the Africa Regional Centre, in Sandton, Johannesburg. Bank officials have hinted that the NDB will soon issue its first regional loan, to help finance Phase 2 of the Lesotho Highlands Water Project, increasing the flow of water from South Africa’s mountainous neighbour to its industrial heartland, Gauteng.

Of course, loans have to be repaid. South Africa is already heavily indebted and the burden is more onerous when the loans are in US dollars, against which South Africa’s rand steadily weakens. NDB President KV Kamath told the summit last week that the bank has already begun to issue some loans in Chinese renminbi (yuan) and is considering issuing others in the currencies of the other BRICS members, perhaps including the rand. So that could reduce South Africa’s interest on future loans.

Ironically, though, part of SA’s debt burden includes the payment – at the rate of about $300-million a year until 2021 – of the US$2-billion which it owes the NDB as the paid-up capital which all five BRICS members had to contribute to initially capitalise the bank.

The BRICS Contingent Reserve Arrangement (CRA), an IMF-equivalent safety net, is nearly ready, though, to rush to the rescue of any BRICS member state which runs into trouble and can’t pay its international creditors.

Whether South Africa really needs the NDB and the CRA or whether it could just as easily tap other international development financial institutions such as the World Bank and, if the need should arise, the IMF, is not quite so clear. Is resorting to the NDB and CRA really economically necessary? Or is it more of a political statement to use institutions which have been established as counters to the supposedly Western-dominated Bretton Woods equivalents?

Perhaps the reasonable answer to that question is that the NDB and CRA offer South Africa more options in the international mix of credit and also, it seems, on more favourable terms.

Ultimately, though, South Africa did not join BRICS just for loans and balance of payments support but to boost its economy more fundamentally by improving its terms of trade and investment with its gigantic fellow members which together constitute around 23% of the global economy and even more of its current driving force.

And here the picture is not very encouraging. As Trade and Industry Minister Rob Davies, the most vocal member of the Cabinet at BRICS, constantly reiterated, the thrust of his government’s economic strategy is to boost growth, unemployment and inequality by increasing industrialisation and exports. An important component of that should be to beneficiate, or add value, to South Africa’s natural resources before they are exported.

South Africa has been looking to its BRICS partners, especially China, to help it do that by buying more processed and manufactured goods from us and increasing investment in South Africa projects which add value. Pretoria has signed both a dedicated Memorandum of Understanding and a Strategic Comprehensive Partnership Agreement with China to that end.

But, as Davies himself acknowledged, South Africa, dwarfed as it is by its four BRICS partners, has, rather anomalously, invested vastly more in them than they have in South Africa. He gave the figures of US$60-billion outward versus only US$18-billion inward investment stock.

A recent report by Deloitte indicates an even wider investment gap. It says that since 2005, “South Africa has been a net investor into BRICS with a record US$82-billion in foreign investments held in BRICS in 2016, while BRICS only held about US$11-billion in foreign investment in South Africa.”

The trade position is similar, the report says. Between 2001 and 2016, South Africa’s trade deficit with the rest of BRICS increased eightfold. Its annual exports to BRICS peaked at about US$17-billion in 2011 (just as it was joining BRICS) and thereafter fell to US$10.6-billion. China was responsible for about 83% of that deficit in 2015, for instance.

The drop in exports may be attributed to the sharp decline in metal prices, rising production costs in South Africa’s mining sector and the lacklustre performance of the global economy,” the report said.

Despite initiatives to reduce the dominance of commodities in its BRICS export basket, South Africa’s raw material exports increased from about 34% to 70% of total exports to the group between 2001 and 2016.

At the same time, South Africa’s exports of manufactured products dropped from about 41% to 24%, while the country continues to import mostly manufactured products from the rest of BRICS. The current imbalance suggests that there is room for a readjustment of South Africa’s trade profile with its BRICS peers,” the report says, adding that “current trade agreements with BRICS countries to promote South Africa’s export diversification have still not taken effect.”

A narrower focus on the period after SA joined BRICS, in 2011, gives a slightly better picture. The Deloitte report says inward investment increased rapidly after South Africa joined the group. In the seven years since then, its BRICS partners invested more than three times more capital in the country than in the seven years prior to joining; US13.15-billion after joining versus $4.05-billion before.

And the report says there has been notable growth in the number of jobs created by investment from the other BRICS members. Between 2003 and 2016, the number of jobs increased from 882 to 3,566 jobs per year, a compounded annual increase of 10%.

While on a state visit to South Africa the day before the BRICS summit began, Xi announced a further $14.7-billion in investment and Chinese banks lent Eskom R30-billion to complete the Kusile power station and R4-billion to Transnet. It was not clear, though, if these loans were part of the $14.7-billion.

And Davies hailed the official launch last week by Ramaphosa and Xi of the R10-billion automobile plant in Coega by the Chinese company BAIC.

The trade figures also show a slight improvement since SA joined BRICS. Exports to BRICS of manufactured goods showed a small overall upward trend, from 13% of all exports in 2011, then a dip to 11% in 2012 and after that a steady incline to 13, 15, 18 and 21% in each of the successive years. The percentage of raw materials meanwhile declined slightly, from 77% of the mix in 2011, then a slight increase to 78% and then a slightly decline to 76%, 74%, 71% and 70% in the following years.

However, manufactured goods and machinery and transport equipment continued to dominate imports from the BRICS partners over that period, holding steady at about 60% of the total import mix every year or even slightly increasing.

All of this means that while BRICS membership can help South Africa at the margins, it cannot affect the fundamental causes of our economic woes. BRICS investors appear to have the same concerns as other investors, including uncertainty about government policy, labour market rigidity, perhaps even crime. And they appear to be making the same discerning judgements as others when importing our goods. DM

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