South Africa’s Reserve Bank has for some time raised the alarm about the inflationary risks posed by a boom in credit, but some analysts say increasing borrowing by businesses may bode well for the economy.
Economists say a marked growth in credit to South Africa’s private sector in recent months may even help the country tackle its huge unemployment rate, provided the money is ploughed into much-needed investment in local industries.
Nico Kelder, an economist at Efficient Research, said much of that was likely to have had headed into manufacturing — a sector vital for its ability to absorb a large pool of unskilled labour.
Also, any boost to manufacturing could eventually herald an important structural change in the economy by lessening South Africa’s dependence on imports and reversing a massive trade imbalance.
”Most of the strong rate of increase we’ve seen … is going to investment … The most important part is it creates capacity in the economy, it creates wealth,” Kelder said.
”We are changing from a short-term, very good economy to a more stable path. Inflation is stable, interest rates are stable, growth is stable. That is what businesses want — certainty.”
Private sector credit extension overall grew by 25,8% year-on-year in December after it vaulted to a record high of 27,48% in October. Reserve Bank governor Tito Mboweni has described banking lending as ”madness”.
But analysts point out that consumers are not the only ones clamouring for credit. So, too, are businesses.
Other loans and advances, the category that normally covers corporates, outpaced all lending and grew by 30,9% in December — a good omen for Africa’s biggest economy, which has suffered from a lack of investment in the post-apartheid era.
That gap has contributed to two major economic constraints.
Firstly, the supply side of the economy has been unable to cope with an insatiable appetite for goods as South Africans enjoy the fruits of the biggest economic upswing in decades, feeding a massive trade imbalance.
The cumulative trade deficit for 2006 swelled to R67,1-billion, helping to push the current-account gap to more than 5% of gross domestic product.
And stagnant production capacity has frozen the ability of industries to create jobs for millions of unemployed South Africans who officially make up a quarter of the workforce.
Internal investment struggled to take off in South Africa in the first few years after the country’s first democratic elections in 1994 amid political uncertainty and a fairly sluggish economy.
But solid growth over the past few years appears to have freed businesses to investment. The economy grew by 5,1% in 2005 — the fastest expansion in over two decades — and by 4,7% in the third quarter of last year.
In response, investment as a proportion of gross domestic product (GDP) grew to 18% last year — the highest level since 1990.
Too many false starts
Still, some analysts argue this trend is in its infancy and means little unless accompanied by greater public investment in ageing transport and electricity infrastructure — and soon.
”They [businesses] are looking for some guidance from the government because we’ve had a couple of false starts in this economy. I go back to 1996 when there was a big spending drive which failed,” said Colen Garrow, an economist at Brait investment bank.
President Thabo Mbeki’s government has pledged to spend R410-billion over the next three years to upgrade electricity and transport — a proposed formula for faster economic growth to tackle widespread poverty and unemployment.
Others say there is no guarantee the credit boom will drive investment, while there are also other variables with which the South African economy has to contend, such as a volatile exchange rate and the relatively high cost of doing business.
”If the boom in corporate credit means they are actually investing, of course it will be positive. It’s still a bit early to make that link,” said Adenaan Hardien, chief economist at Cadiz African Harvest Fund Management. — Reuters