CRAIG MORKEL: End reliance on global supply chains to power SA’s long-term prosperity

Should it be a cause for celebration that the IMF marginally upgraded its 2022 GDP forecast for SA? As the global outlook continues to look gloomy, particularly in Europe, a renewed interest in emerging markets, driven in part by higher commodity prices, could bode well for SA’s growth outlook.

While the outlook has improved moderately, it is still expected to be worse than most African peers. According to the IMF Regional Economic Outlook, African economies are forecast to expand 3.8% in 2022 and 4% in 2023, while SA’s figures could be 1.9% and 1.4% respectively. 

SA is plagued by energy insecurity, including fuel and electricity supply shortages; environmental unsustainability, including high greenhouse gas emissions from mainly coal as primary energy resource; socioeconomic challenges, including unemployment, poverty and inequality; and higher energy costs, including higher prices for transport, heating and cooking fuels, besides electricity. Foreign direct investment would represent welcome relief to the above crises, but the question is whether this would be enough.

One of the clear consequences of the Covid-19 pandemic and the Russia-Ukraine war is how evidently dependent SA is on market dynamics, especially supply chains and the financial health of developed economies. The high-inflation, high-interest environment has placed unprecedented pressure on domestic consumers. Inflationary pressures, driven largely by higher energy costs, are also influenced by depressed Chinese growth.

SA is not immune to such global economic contagion and now requires intensive economic care before it can be fit enough to grow independently and consistently.

Stats SA’s consumer price index (CPI) reports show that annual inflation broke through the upper limit of the Reserve Bank’s target range in May and has since remained above that level. Food and nonalcoholic beverage prices have become inflated, with an increase of 11.3% year on year in August.

To illustrate how dramatic the effect has been, the KwaZulu-Natal Household Affordability index recently indicated that the price of a basket of groceries comprising commonly purchased products has increased almost 14% over the past year. This economic fever needs to be reduced to within a manageable pain threshold.

In the private sector there has been a strong trend for SA companies to localise their manufacturing and take greater control of their respective value chains. The adverse effects of SA Inc’s dependence on global supply chains were highlighted during the Covid-19 pandemic. The strain on businesses and households was worsened by the Russian-Ukraine conflict in early 2022, forcing SA importers to source alternative raw materials, manufacturing capacity and logistics supply lines without disrupting their operational sustainability.

From a geopolitical perspective, SA Inc needs to fast-track its programme to end its reliance on global supply chains; particularly in light of the pervading energy crisis in primarily the developed world, including its overdependence on goods manufactured in Asia, especially China as the world's factory.

Of course, localisation should not mean isolationism or protectionism. SA’s economy can only thrive through robust participation in global and regional markets. As such the country could fabricate, assemble and manufacture more foreign goods under licence to serve as the world’s African value-added distribution hub.

However, to ensure that we derive greater economic benefit from its participation in such global value chains SA urgently needs to overhaul its dysfunctional infrastructure, including electricity, port, pipeline, rail, road and aviation corridors locally and into Sub-Saharan Africa.  

Any supply chain is only as strong as its weakest link, and unfortunately SA’s industrial capacity is beset by multiple weak points, notably transport congestion, social instability worsened by unemployment, and above all an unreliable energy supply that undermines the operational capacity of commerce and industry.

In this context a strong focus on revitalising SA’s infrastructure presents an excellent opportunity to boost the economy now that it is needed most, but only if we make a concerted effort to attract such countercyclical investments.

Given the scope and scale of our infrastructure requirements we need to attract the kind of foreign direct investment at a scale and pace that makes a big difference to our capacity to effectively service local, regional and global markets.

The economist Mike Schussler wrote shortly before his death that local manufacturing production levels between May and July 2021 were lower than in 2005. SA’s share of global manufacturing by value had declined since the 1980s, whereas the median increase for countries with only a decade-old manufacturing history was 15.5%. This represents an astonishing opportunity for SA.

We need to urgently reduce our reliance on imports to redress SA’s trade imbalance. Coupled with this, the state and private sector need to both invest heavily in local skills, supplier and enterprise development programmes and commercialise locally researched and developed technology-based solutions that could be integrated with those of our foreign trading partners.

A successful localisation programme depends on extensive local and foreign investment in production of our natural endowments; the assembly and manufacturing of value-added goods and the capacity of critical infrastructure.

For SA to realise its potential as a leading pan-African producer and the world’s African distribution hub, it must set itself free from being overdependent on developed economies by forging more interdependent, mutually beneficial relationships with its trading partners.

By prioritising local assembly, fabrication and manufacturing for at least local and pan-African markets in collaboration with the suppliers of otherwise foreign-manufactured goods, SA will go some way in solving its unemployment, poverty and inequality challenges, while also mitigating the risk of global supply chain disruptions to the mutual benefit of foreign exporters to Africa.

The 27th Conference of the Parties (COP27) to be held in Cairo, Egypt in 2022, and the continuing negotiations on the just energy transition finance package between SA and the developed economies of the global North present opportunities to leverage articles 6 and 9 of the UN Framework Convention on Climate Change for such trade deals, not aid or debt. 

It is common cause, also from World Bank studies, that decarbonisation costs in the global North — estimated to be greater than $100/kg of CO₂equivalent — are higher than in the global South, which are less than $10/kg CO₂-e. Therefore, investments in decarbonisation projects in SA, including any and all greenhouse gas emissions reduction projects and the enabling infrastructure, would realise a saving for the global North.

SA has a once-in-a-generation opportunity to share in such savings to the global North — estimated to be greater than $90kg/CO₂-e — to finance cleaner and more inclusive economic growth.

• Morkel is gas economy leadership team chair at the SA Oil & Gas Alliance.