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South Africa must protect competitive advantages as BRICs build ties with Africa

Global Banking And Finance 1 News

South Africa should be cautious not to offer too much to firms from BRIC countries that will increasingly be more competitors than collaborators in unlocking Africa’s allure, says Simon Freemantle, economist and researcher at Standard Bank.

Ahead of this week’s BRICS Summit in New Delhi, Mr Freemantle outlines issues and risks for South Africa in emphasizing its status as a gateway to Africa and in potentially over-relying on BRICS countries for trade and investment.

The New Delhi summit is the second South Africa has attended since the original invitation by the Chinese government in December 2010.

“To be clear, South Africa stands to gain from BRICS inclusion, if not economically, then certainly in the Geo-political arena. It is better to be in than out. Yet, certain important cautions must be noted for South Africa to retain competitiveness and ensure reciprocal gain from BRIC intimacy,” says Mr Freemantle.

He argues that South Africa should take care to maintain its competitive advantages as the country has a clear vantage point from which to view and participate in Africa’s commercial unfolding.

Trade patterns clearly reflect this promise, he says. Four of the top five regions in the world with which South Africa ran a trade surplus in 2011 are African, led by SADC at R46.1-billion, but followed by North-East Africa at R8.3-billion, North Africa at R3-billion and Central Africa at R1.4-billion.

By comparison, South Africa had a trade deficit of R57.3-billion with Europe and R82.3-billion with Asia (including a deficit of R15-billion with China).

Mr Freemantle argues that it is not only the volume but also the composition of South African exports that matters: “While South Africa’s export profile to Europe is fairly balanced, the same cannot be said for China and other large emerging market partners. In 2011, of South Africa’s R103-billion in exports to China, virtually 90% were made up of commodities.”

In contrast, he highlights that South Africa’s exports to Africa are far more diverse, and lean towards goods with a value-added component. Of South Africa’s R73.4-billion exports to SADC, roughly 15% was made up of machinery, 8% by vehicles, and 6% by electrical and electronic equipment and articles of iron and steel, respectively. Around half of all manufactured goods exported by an African country to the rest of the continent are produced in South Africa.

On the back of this trade advance, South Africa’s investment footprint in Africa is swelling noticeably, building the country’s corporate footprint across the sub-continent. Almost 100 large South African corporations have substantial operations in the rest of the continent, providing profound support to their growth.

Yet, other emerging markets matter too, says Mr Freemantle. Standard Bank Group has identified the “EM10”, the 10 most important emerging markets for Africa which, in addition to the BRIC economies, includes Turkey, Saudi Arabia, Indonesia, Thailand, South Africa and Nigeria.

South Africa’s trade with Nigeria amounted to over R28.2-billlion in 2011, with Thailand at R19.8-billion, Indonesia at R11.5-billion and Turkey at R8.2-billion. Trade with Russia, on the other hand, came in at just R3.5-billion.

“When the BRICS Summit was forged it became an overtly political rather than economic entity. As such, while select strategic and Geo-political goals can be achieved on the BRICS platform, it should not encapsulate the entirety of South Africa’s emerging markets reorientation,” says Mr Freemantle.

He argues that the idea of a shift from west to east is alluring, yet simplistic. “Yes, the poles of commercial influence have widened, with Asia, Latin America and Africa becoming more prominent. But the advanced world still matters a great deal. The EU27 remains South Africa’s largest trade partner, and scope exists for broadening South African non-commodities exports to the region.”

Though China has carved out a strong investment footprint in Africa in recent years, the Eurozone remains by far the largest investor on the continent. Mr Freemantle believes ignoring these powerful economies would be naïve and shortsighted. He says countries that are able to balance the shift, to develop new relationships which complement rather than contradict existing partnerships with traditional partners, will prosper.

“There are clear areas of cooperation which can be underlined at the BRICS Summit. China has been broadly successful in lifting hundreds of millions of people out of poverty, while Brazil has had remarkable success in reducing inequality through direct government policy intervention,” he says.

“Sharing learning in these key areas could be critical, particularly as the world engages with the common challenge of climate change.”

Mr Freemantle believes agreement among the BRICS on a common position towards the Doha round of World Trade Organisation negotiations would be powerful, reflecting the might of the global south in an increasingly multi-polar environment.

“Further, negotiations for more cooperation between BRICS’ development banks, particularly if channeled into coordinating development assistance projects in Africa, could enhance efficiency and support growth.”

Mr Freemantle also expects some collaboration in the BRICS partnering in increasing the geographical reach of the Five Rs (the Rand, Real, Renminbi, Ruble and Rupee) in facilitating trade and investment.

“The BRICS are just USD1.3tr smaller than the US and will overtake the US in 2013, account for half the world’s population and FX reserves, and make-up 17% of world trade. Yet in nearly all of their cross-border transactions, the USD is the central pivot. Hence, the BRICS wants to increase the pairs against which the Five Rs can trade. So, starting amongst themselves makes sense.”

Global Banking & Finance Review


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