Clem Sunter – Latest Global and SA Economic Scenarios

October 2010

We were fortunate to attend a session by Clem Sunter this month. As usual, he gave an excellent presentation on the latest global economic scenarios and the possibilities for South Africa. He also talked about how pockets of excellence need to be talked about, encouraged and praised.

He presented three scenarios for the global economy and gave us flags to judge which scenario becomes increasingly likely:

1. Hard Times
   The economic recovery will be flat like corrugated iron, little up, little down. Recovery will only happen in 2016. This is because the major problem of debt has not gone away. It has shifted slightly away from consumers and businesses to governments. It has become trickier as defaulting banks can be closed down, but one can’t exactly close down a country! Clem Sunter calls this the ABBA principle – “Bailing You, Bailing me”!
   The ratio of government debt/GDP is still very high and climbing. It is 65% in the UK, 88% in USA and 200% in Japan. All but four states in the USA are bankrupt.

Magnitude of debt increases as well as the deficit funding problems
Labour unrest in China
China property bubble burst
 

2. New Balls Please
   Recovery will occur in 2012, i.e. much faster, but the game will be very different to now. Banks will be much more heavily regulated e.g. Basel lll; credit will be more difficult to get; the East will become the equivalent of the West (e.g. GM sold more cars in China than in the USA over the past four months), and there will be a resource crisis.
   The resource crisis will result in a commodity supercycle and focus will now be on resource consumption efficiency e.g. solar energy.

No serious drop in USA unemployment
No growth in property value and/or stock market
 

 

3. Ultraviolet
   Here the recovery will be at two speeds. The developed world will grow at 2 -2½% - UK, Europe and Russia - and the developing world at 5-6% - China, India, Brazil, and Africa. The jury is still out on USA and Japan. Any investment and business strategy will need to take this into account.
   
   China controlling own currency too much
   
   
   
    

4. Perfect Storm
   The last scenario is a serious “U” – steep and long. The world will become unstable, hostile and countries focussed inwardly.

Major War
Nuclear Terrorism
Upsurge in protectionism

 

The percentages attached to each scenario are Hard Times 30%, New Balls Please 20%, UV 40% and Perfect Storm 10%
For South Africa, Clem gave three scenarios:

1. Stay in the Premier League
   This is based on the Global Competitiveness Report – see summary at end. Although SA slipped to 54 from 45 last year, it still remains in the top echelon. Its position has remained stable, other countries have improved. However the slide downwards is concerning and shows that South Africa must increase its competitiveness to remain in the Premier League or else it will be relegated to the Second Division.

Non Inclusive leadership - Inclusivity means on the one hand keeping the rich minority - who have the capital and a fair measure of skills - on side; but also creating the opportunities for the marginalised poor to become part of the mainstream economy
Cutting down the tall poppies – not promoting and celebrating excellence
Increase in unemployment
                 Nationalisation
                 NHI – misguided understanding of the costs involved
                 Media Tribunal – arrest of first journalist will be catastrophic
                 Land Grabs

There are some green flags that can also assist in South Africa turning itself around and away from the Relegation Zone and dropping into the Second Division.

Extract more value from our natural resources i.e. beneficiate
Use the success of the World Cup to encourage more tourists
Be the gateway into the rest of Africa – we produce 30% of the GDP with only 5% of the population
Become passionate about promoting and growing small businesses and entrepreneurs to bridge the gap between the first and third worlds in this country
                 Celebrate pockets of excellence e.g. SARS, Children’s Red Cross Hospital
 

2. Slide into the Second Division
   SA becomes a third world economy, there is poor tax collection and no access to world finance.
   
   Sliding further down the Competitiveness Index and other global surveys
   
   
   
   
    

3. Failed State
   No-one will want to have anything to do with South Africa. Think of other failed states – Somalia, Zimbabwe, and Iran. There is only one flag and this can relegate South Africa immediately from the Premier League.
   
   Violence
   
   
   
    

Percentage possibilities Premier League – 60%, Second Division – 30% Failed State – 10%

Summary of World Competitiveness Report on South Africa
South Africa, at 54th overall, remains the highest-ranked country in sub-Saharan Africa. While it has dropped somewhat in rank since last year, its performance has in fact remained stable and the decline reflects improvements in other countries. South Africa still benefits from the large size of its economy, particularly by regional standards (it is ranked 25th in the market size pillar). It also does well on measures of the quality of institutions and factor allocation, such as intellectual property protection (27th), property rights (29th), the accountability of private institutions (3rd), and goods market efficiency (40th). Particularly impressive is the country’s financial market development (ranked 9th), indicating high confidence in South Africa’s financial markets at a time when trust has been eroded in many other parts of the world. South Africa also does reasonably well in more complex areas such as business sophistication (38th) and innovation (44th), benefiting from good scientific research institutions (ranked 29th) and strong collaboration between universities and the business sector in innovation (ranked 24th).

While a number of attributes therefore make South Africa the most competitive economy in the region, in order to further enhance its competitiveness it will need to address some weaknesses. The country ranks 97th in labour market efficiency, with inflexible hiring and firing practices (135th), a lack of flexibility in wage determination by companies (131st), and poor labour-employer relations (132nd). Efforts must also be made to increase the university enrolment rate of only 15 percent, which places the country 99th overall, in order to better develop the country’s innovation potential. In addition, South Africa’s infrastructure, although good by regional standards, requires upgrading (ranked 63rd) beyond what has been achieved in the preparations for the 2010 World Cup. The poor security situation remains another important obstacle to doing business in South Africa.

The business costs of crime and violence (137th) and the sense that the police are unable to provide protection from crime (104th) do not contribute to an environment that fosters competitiveness. Another major concern remains the health of the workforce, ranked 127th out of 139 countries, the result of high rates of communicable diseases and poor health indicators more generally. Improvements in these areas will enhance South Africa’s productivity and competitiveness.