Excellent analysis on the critical issue of SA’s burgeoning trade deficit

Frans Cronje, the Chief Executive of the South African Institute of Race Relations joined Alec Hogg on CNBC Africa's Power Lunch following the widening of South Africa's trade deficit to R21bn in October 2014. Cronje lends a bevy of factual insights to the dire problem that South Africa is facing as its trade deficit widens, exacerbated by a weak rand, and the fact that it is very difficult to shorten the gap when you are a 'country that doesn't make stuff.' One thing is clear, immediate action is required to begin the process of turning around factors working against an economy with the potential to do so much better. – LF.ALEC HOGG: South Africa's Trade Deficit widened to R21-billion for October and that was from a revised R3bn shortfall in September. It is the highest in four years, but these are all over the place, as we know. Every month, all kinds of issues come through. However, the trends over a long term is what we should be focusing on and to help us do that is Frans Cronje. He is the Chief Executive of the South African Institute of Race Relations. Frans, I love the piece you put together – having a look at the vulnerabilities of South Africa's trade relationship with other parts of the world. You took the numbers, dug into the detail, looked at them over time, and came up with some pretty concerning issues. For instance, how vulnerable we are to the EU and China as a starting point, and how much more of their products we buy than sell to them. Is there an ideal circumstance to be in?.FRANS CRONJE: Good afternoon. It was a report that came out last week, tracking South Africa's trade with the world. It started with major trading partner. It's what you expect to see. China's the biggest trading partner but as a region, the EU is still, twice the size of China. However, we rack up major trade deficits with almost every major trading partner except (interestingly) for the U.S., which is AGOA at work. Then we looked at emerging markets and when we drew the graphs on that, it stands out, so strikingly. We're racking up major trade deficits with most major emerging markets and we might have small surpluses with some of the more insignificant ones. Then we went to our trade relationships with Africa and with the African energy producers, we're racking up major deficits again..GUGULETHU MFUPHI: Just on that, can we fix that, especially given the lower oil price environment at the moment?.FRANS CRONJE: It's going to come back a little bit because our major import is energy, so the lower oil price is going to bring that number back somewhat, but after that – no. It's the story you expect to see. We are importing manufactured goods. Energy's at the top. The next nine items are major manufactured goods. Our exports. Only two manufactured goods in the top ten: motor vehicles, which is the heavily subsidised motor industry and machine parts. The headline on one of the articles in Biznews last week was 'this is what happens when you're a country that doesn't make stuff'..ALEC HOGG: Let's talk about AGOA because that's something that has to be at risk with South Africa's international relations. We seem to be friends with everybody except the Americans who, as you've just explained, because of this AGOA structure are in fact, running a deficit with us. We're doing a surplus with them..FRANS CRONJE: It's already at risk. There've been many unrelated issues, a lot of conflict over intellectual property rights. We know that, that fight has been taken to the American Congress who have been told 'use AGOA, as a stick to beat the DTI with in South Africa, to say that if you're going to threaten our intellectual property rights, we're going sink AGOA'. We are very vulnerable to that, but the vulnerability is the real story to come out of the report with China perhaps slowing down a little bit. There've been some pretty alarmist stuff written about China slowing a bit further, but I think that with what's happened to the oil price, you can write that off. With the EU being fairly dead, maybe the oil price is a little bit of a lifeline for them. Our major trading partners aren't going anywhere but the most striking, single outcome of that report is what happens when you track the weakening Rand against the trade deficits..The story of the weak Rand fundi is that the weakening currency is good for South Africa. It just doesn't come out. As the Rand dives, the trade deficit gets steeper with the Rand..ALEC HOGG: Because we're not exporting….FRANS CRONJE: Well, that was always the point. You'll remember that we went through these debates five or six years ago. COSATU was a big backer of the weak Rand and we said 'well, in theory this all makes sense' except… Look at industry in South Africa. Look at what we're exporting. There's just nothing there. We're just going to import costs by weakening our Rand and now that's certainly, what's happened. A further Rand weakness, which I think we must expect coming into next year, is something that's going to make it even more difficult for us to take advantage of these international windfalls such as the weakening oil price..GUGULETHU MFUPHI: Is there any way for us to fix this by boosting manufacturing locally?.FRANS CRONJE: Absolutely. It's the only thing. You have to export more stuff. Now, in terms of natural resources there are certain limits. We exploit that to a certain extent. I think that policy in mining has been so hostile, that we've missed out on the full potential of doing that but ultimately, we have to make things that other countries want and we have to send those things overseas. That means you have to address the domestic constraints on manufacturing and they are, again, the well-known clichés: difficult labour market environment, difficult labour legislation, and difficult empowerment policy. What's now catching up to all of that is growing threats to property rights. If we can't turn that around, we can't turn the trade deficit numbers around either..ALEC HOGG: I'm worried about AGOA and you've addressed that as well, but I guess one has to be even more worried about the Four Horsemen of the Apocalypse that you've just mentioned a moment ago, i.e. labour legislation and we know what's happened to the manufacturing sector in South Africa. Is there any signal that Government or those who make the laws, are paying attention?.FRANS CRONJE: There are, indeed. Our private experience (and we're spending a bit more time talking to the South African Government) is that there is now a willingness to listen to alternatives and I think that in private, there is now a consensus view amongst (I'd say) half the Cabinet, that South Africa's in trouble and that we need to get out of trouble. There are also the little embryonic countervailing forces. The idea of the youth wage subsidy: it's a fundamentally useless policy and will never create many jobs, but it's critically important for another reason. It's the first time the Alliance is admitting that constraints on the labour market are such regulatory constraints, that without special mechanisms we don't think the private sector can create jobs. Continue that line of thinking past the wage subsidy and you're looking at the beginnings of reform..There are the little embryonic signs, but it's late in the day now and this is turning the oil tanker around. We'd certainly have been more confident if we'd seen signs of turning, 18 months ago..ALEC HOGG: But we're a resilient country. We know what our business leaders have done when given the opportunity on a global stage. They've punched way beyond their weight. GIBS comes out with these research reports all the time. It's almost like you just need that little bit of extra weight to move in the right direction..FRANS CRONJE: Well, you need action now. We hold out some pretty optimistic scenarios for South Africa and those all originate out of things getting very much worse, quite quickly – forcing the hand of reformers. They become more influential within government and the Cabinet within the Alliance and they start to drive reforms. However, if you want the real argument on the upside, it is that we're not as vulnerable to China as we think we are. We're not as vulnerable to the EU. Its domestic decisions, those that are 100 percent within the power of our Government, our Parliament, and our Cabinet to make, that are able to turn this ship around. If we get to a point where we're willing to make those decisions, have no doubt; you will see things improving quite quickly..GUGULETHU MFUPHI: Is there a role, for the private sector to play?.FRANS CRONJE: Of course, there is…a significant role. I think a lot of the role needs to be to put pressure on reform in the most diplomatic possible way and running a fairly prominent think-tank in South Africa, one of our great frustrations is the private sector. We will hear in private (quite rightly), many concerns about where South Africa is headed. The views expressed by Johann Rupert last week are commonly held in boardrooms around the country, and have been for many years, but they don't get into the public domain. I think business needs to learn that there are ways to have an influence. Unfortunately, more often than not, instead of having that influence we are starting to see companies that are making their Plan B, taking advantage of growth into Africa and growth into the rest of the world. As one mining executive put it (and I can understand his position). He said 'let the Government make policy. We will invest accordingly'..ALEC HOGG: Just to close off with, do you think that what Johann Rupert said at the AGM last Tuesday was contributing to fixing the problem or might it put the politicians even more on the defensive?.FRANS CRONJE: Oh, no. Not at all. I think this is a trick, which business has missed. The ANC is a pragmatic party and wherever it's come to a T-junction in its long history of more than 100 years, it's ultimately made the right decision. It needs a bit of prodding and if it runs into resistance, it will step back. It will consider its position and it will make decisions. We've seen great examples. The prominent was about a year ago. The then Head of BMW in South Africa, Bodo Donauer, after BMW had lost out on the opportunity to make a new model of vehicle here, saying publicly that this cost the country a great deal and that his team in South Africa worked very hard on trying to get that. Ultimately, they were sabotaged by domestic policy thinking. I think that if more business leaders (and businesses are like trying to herd cats). I don't think it can happen on an organised level..I think it has to happen on a bilateral level. Key prominent CEO's need to say politely, sensibly, and in the most constructive way 'we want to make a contribution to South Africa but you, as the Government, are making it very difficult for us to realise the potential that this country and this economy actually has'..ALEC HOGG: So 'viva, Johann Rupert, viva'. That was Frans Cronjé, Chief Executive of the South African Institute of Race Relations.

Excellent analysis on the critical issue of SA’s burgeoning trade deficit

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