FIFA World Cup Africa fever

*RAZIA KHAN | Friday June 11, 2010 00:00

The consensus estimate is that the World Cup will add 0.3-0.5ppt to South African GDP growth in 2010. The hope is that the tournament will also help to dispel long-held misperceptions about the region, leading to increased trade, investment and future prosperity. As the World Cup slogan suggests, 'Ke Nako' - It is time. Africa's time.

The immediate impact is difficult to quantifyEstimating the economic impact of a large sporting event is hard, as such studies have historically had a significant upward bias. They are almost always more optimistic before the event than the impact measured afterwards. The academic literature on the subject shows that very few globally important sporting events have had any statistically significant impact on regional income or employment - in some instances, the effect has even been negative. For markets, the slump that is expected to follow a major sporting tournament is almost written in stone, whatever the immediate triggers (think Beijing after the 2008 Olympics, or Athens 2004). The question is, will South Africa be different? The national government has already spent an estimated R 30bn on the tournament, with an additional R 9bn spent by cities and provinces - a total sum which far exceeds the amounts envisaged at the time of South Africa's World Cup bid. At 1.6 percent of GDP, this spending may be less than the fiscal stimulus seen elsewhere, but for South Africa, the timing was crucial.  Much of the investment (primarily in stadia and transport infrastructure) took place after the global crisis and the slowdown in South Africa's economy preventing what may otherwise have been a more severe slowdown. The timing of public investment in infrastructure (and its role in providing a counter-cyclical boost) was key, suggesting that its importance went beyond its rather modest share of GDP.

 South Africa may stand apart from developed-country World Cup hosts in that the return on infrastructure spending is likely to be higher. Build an additional stadium in Germany, which already has plenty, and diminishing returns will eventually set in. But in South Africa, the need for improved infrastructure - especially transport - is more important.

While the majority of studies imply that the economic benefits of hosting a major sporting tournament rarely match up to the costs involved, most of them were conducted in developed countries. Their findings may not be directly applicable to South Africa - not least because of the country's high unemployment rate, currently above 25 percent. Job creation, even if driven by a shortterm spike in public expenditure, still yields a high social return. Severe cutbacks in public spending in the 1990s by a new ANC government compelled to prove its market-friendly credentials and reduce high debt levels inherited from the apartheid regime dampened growth.

Only when trust in the government's fiscal conservatism was well-established, and there was some room for public expenditure to recover, did South Africa see an improvement in trend growth.

Most of the stimulus came from infrastructure spending Infrastructure spending is likely to provide the main economic boost from the World Cup, but much of this has already taken place. From this perspective, there is little new stimulus yet to be seen. Much of the economic impact of the event will now depend on visitor arrivals. According to FIFA, South Africa has sold 97 percent of the 3mn tickets available for this World Cup, exceeding the sales seen at the 2006 World Cup in Germany. But with airlines offering last-minute discounted fares and hotels slashing room rates, the suggestion is that visitor arrivals may disappoint. While some studies have suggested that longer visits and higher spending will compensate for lower tourist numbers, there is little conclusive evidence to support such forecasts. The fact that the World Cup is being hosted at a time when the global outlook is uncertain will almost certainly impact spending behaviour. Domestically, news commentary has focused on the negative structural effects, with trade unions bidding up wages in an otherwise low-inflation environment by threatening disruptive strikes during the tournament. While it is difficult to judge whether wage demands would have been any different in the absence of the World Cup - South Africa's inflexible labour markets are beset with structural issues that make it difficult for the unemployed to influence wages - consumption has been the missing factor in South Africa's economic recovery. This is where the feel-good factor emanating from the World Cup could really make a difference.

* Razia Khan is the Standard Chartered Head of Macroeconomic Research/ Regional Head of Research, Africa.