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Davos deliberations and the SA economy

As is the case every year many topics involving the global economy are discussed at the Davos World Economic Forum.

This year focus on the acceleration of developed-market GDP and its impact on emerging market economic growth have been presented.

However, one of the concerning topics from a South African perspective was the session on 'BRICS in Midlife Crisis'.

An interesting development from the Davos deliberations is the fact that six sessions were devoted to Africa. The African continent is recognised as one of the last frontier markets, consequently its potential as a foreign investment destination is being given serious consideration by both developed and emerging markets.

From a South African perspective, how do these developments impact the South African economy?

On the positive side, an accelerating global growth outlook could be mildly supportive of commodity prices.

Given the weak rand, any increase in dollar commodity prices would increase revenues from the mining sector and help reduce the current-account deficit.

Additionally, acceleration in the developed world, especially the UK and Europe, would benefit exports through the demand for manufactured products, especially in the vehicle manufacturing sector.

Sub-Sahara African economies have, in general, achieved GDP growth rates of around 6%.

It is forecast that these growth rates can be maintained for the foreseeable future.

Over time this growth will largely be driven through increasing infrastructure and consumption expenditure.

The South African construction companies would be especially well placed to benefit from this trend as it unfolds.

In addition, our food and clothing companies are slowly but surely expanding into Africa.

The Davos BRICS discussion illustrates that South Africa faces certain economic challenges.

Factors hindering the potential GDP growth of the South African economy include commodity prices, labour policies, electricity, rail infrastructure and the lack of a technologically advanced manufacturing sector.

The Ashburton Investment forecast for global GDP growth is for acceleration from 2.9% in 2013 to 3.5% in 2014.

Despite the forecast increase in global GDP, it is our view that for commodity demand to accelerate meaningfully, global GDP growth rates of between 4.5%-6% are required.

Thus questions are being raised, that if there is no bull market in commodity prices, are the BRICS economies a preferred investment destination?

Added to South Africa's challenges, the country currently suffers from the inadequate generation of electricity to sustain a growing economy.

At present the reserve margin is low and some commentators fear rolling blackouts this winter.

This lack of increased electricity supply places a ceiling on economic growth.

However, the Medupi power station is scheduled to come into partial production towards year end. This development would alleviate the current supply shortage.

Labour polices in South Africa are, in a developed market context, restrictive and many companies are reluctant to hire staff, placing a brake on potential growth.

Recently the South African labour market has been placed in turmoil through strikes in the mining, manufacturing and agricultural sectors.

Moreover, the lack of a rapid and efficient rail network is also a barrier to potential growth.

Currently, coal and iron-ore exports are constrained by insufficient rail capacity.

The lack of a "hi-tech" manufacturing sector in South Africa primed to take advantage of the global demand for television sets, tablets, computers and smart phones is also a deterrent to potential growth.

Finally, the South African government has produced a well-considered economic blueprint for South Africa termed the 'National Development Plan'.

To achieve success the plan requires the buy-in and implementation by all stake holders, which includes the government and the private and public sectors.

Should this buy-in be realised, then the country may achieve higher levels of growth and join its sub-Saharan neighbours which are attaining growth rates of around 6%.

Paolo Senatore is chief investment officer (South African single manager funds) at Ashburton Investments.

Click here for a special feature on this year's World Economic Forum in Davos.