Previous Quarterly Editions
Expropriation Risk: 54 57 57 57 ►Political Violence Risk:48 48 48 48 ►Terrorism Risk:28 26 26 26 ►Exchange Transfer and Trade Sanction Risk: 45 45 54 54 ►Sovereign Default Risk:65 65 65 65 ►
TREND ►
Protest intensity to date* 2022 2023 Low MediumUnrest risk in 2024**Cost of living: HighAnti-austerity: High
*Note: Protest intensity is calculated based on ACLED. **Risk levels are calculated by WTW. Where data are missing no risk level will be displayed. For details of 'anti-austerity' calculations, see the essays in the introduction; for details of 'cost-of-living' calculations, see the previous edition of the Index.
In its Article IV consultation report in June 2023, the International Monetary Fund (IMF) rated South Africa’s risk of sovereign debt stress as overall moderate but high in the medium and long terms. The IMF’s debt sustainability analysis concluded that the authorities still have time to address risks in the form of persistent weak growth, elevated fiscal deficits and contingent liabilities from state-owned enterprises.
Markets and international financial institutions have historically seen mitigation for poor fiscal performance in the depth of the domestic investor pool, relatively small foreign debt exposure, preponderance of long-term debt, strength of the South African Reserve Bank (SARB) and National Treasury, and long-term political stability bestowed by African National Congress (ANC) electoral dominance.
Some of these buffers are less secure than they were. The quality of the Treasury and SARB remains unimpaired; however, the political context is less favorable. Weak leadership and fragmentation of the ANC mean that a wide split has emerged between the official government commitment to fiscal consolidation and reckless expenditure in the present (an unbudgeted public service pay deal) or future (a planned national health insurance scheme and a possible basic income grant). Such future commitments may or may not be delivered, but at the least they are the cause of substantial fiscal uncertainty.
The possibility of the ANC failing to gain an overall majority in the April 2024 general election also heralds unprecedented political uncertainty, especially if a repeat occurs of the coalition chaos that has marked metropolitan municipal government since the past two municipal elections.
While a high proportion of domestic ownership of debt has previously been looked on as a strength, in its Financial Stability Review (May 2023) the SARB flagged the high and increasing exposure of the domestic financial sector to government debt as a new vulnerability. Demand for new issuances of South African government bonds from non-resident investors has weakened, and the proportion of these held by local investors increased to 75% in February 2023 from 58% in April 2018.
Awareness of developing fiscal crisis escalated sharply in mid-September when it became clear that government revenue for 2023 would significantly undershoot projections in the February budget — increasing the likely deficit. The Treasury submitted sweeping policy proposals to contain expenditure, including radical restructuring of government departments and agencies. This led to a crisis meeting with the cabinet called by President Cyril Ramaphosa and to demands by the trade union federation, COSATU (the Congress of South African Trade Unions), that the unbudgeted public service pay rise should not be frozen and that increased private sector involvement in state-owned enterprises should not involve job losses.
The politics of the debt crisis are acutely sensitive in the months leading to the April 2024 general election. While growth-supporting reforms have made progress, momentum has been slow and ambitions limited by political opposition; however, without growth higher than the SARB’s prediction of 0.7% for 2023, policies of expenditure containment alone will not resolve escalating debt, and drastic tightening is politically implausible in the face of the election. Finance ministers face an unenviable task in crafting the medium-term budget policy statement (MTBPS) for delivery in November.
The much-delayed Expropriation Bill, which was passed by the National Assembly in September 2022, remains before the National Council of Provinces (NCOP), South Africa’s second parliamentary chamber. The NCOP has not finished reviewing comments by the public and provincial parliaments. The bill’s origins are in a cabinet resolution of March 2004 to review the existing (1975) act. Since 2004, legal and constitutional issues have greatly delayed the progress of previous iterations of the legislation.
Among procedures of more general application, the bill sets out specific conditions under which nil compensation may be paid for expropriated land and conditions for equitable and fair compensation. The government claims that constitutional amendment to allow expropriation without compensation (which failed in December 2021) will no longer be necessary.
The bill emphasizes due process and safeguarding of rights under the constitution. The main opposition party and other critics, however, maintain that there are areas of ambiguity that could be used as leverage for a program of wholesale expropriation, not confined to land, under a future populist government.
More than 230 state entities may expropriate. Concerns are driven by exceptionally low trust in government in the aftermath of state capture revelations, widespread incompetence of state entities and political uncertainties should the ANC lose its overall majority in April 2024. Constitutional challenge to the new legislation is likely.
At the anniversary of the July 2021 wave of violence, looting and arson, numerous trucks were set alight on the main logistics arteries in three provinces, triggering the deployment of army units. No demands or claims of responsibility were made. Possible causes include truck drivers’ anger at the employment of foreign nationals in the industry and the prospect of former President Jacob Zuma being returned to jail to complete a 15-month sentence for contempt of court. This grievance was removed in August 2023 when the return to jail was cancelled as part of a program to ease overcrowding in jails.
The head of the government-backed South African Special Risks Insurance Association (Sasria), which covers businesses and individuals against political violence, warned on the anniversary of July 2021 that a repeat of the uprising was a risk. Continuing high levels of unemployment, especially among young people, were cited. Sasria was inundated by claims amounting to 30 billion South African rands (ZAR) (nearly US$1.6 billion) in 2021. In the second quarter of 2023, the official and extended unemployment rates declined by one-third of a percentage point each, to 32.6% and 42.1%, respectively. The rate for 15- to 34-year-olds was 45.3%. There are 3.5 million people aged 15 to 24 not in employment, education or training.
Since the U.S. Embassy’s false alarm of a terrorist attack on Johannesburg’s financial center in October 2022, no new threats or instances of domestic terrorism have occurred, and overt threat levels remain low. Concerns remain over terrorist supporters in South Africa organizing and financing terrorism elsewhere in Africa.
This was highlighted by the murder of a Directorate of Priority Crimes Investigation (“the Hawks”) officer in August 2023. He was the lead investigator into the disappearance in December 2022 of an alleged Islamic State-affiliated organizer who had been sanctioned by the U.S. Treasury. His family claims that he was abducted by South African and U.S. special forces. The Hawks officer was working on the case when he was shot.
Deteriorating terms of trade reflected in lower commodity prices, concerns for the global economic growth outlook and high U.S. interest rates have continued to curtail risk appetite and are expected to remain in the medium term, maintaining pressure on South Africa’s currency.
Country-specific factors such as load shedding and logistic constraints add to the pressure, leaving the rand volatile and vulnerable to shocks in the medium term. The currency has lost over 10% against the U.S. dollar in 2023 and reached record lows of over ZAR19 to the U.S. dollar in May. Since then, despite a brief respite in June/July, the rand has traded in a range from over 18 to just over 19 to the U.S. dollar.
Weak currency feeds into inflation, as the SARB noted while leaving borrowing costs unchanged for the second consecutive meeting in September 2023, but without ruling out further hikes.
In May, South Africa’s perceived closeness to Russia raised the possibility of U.S. secondary sanctions. This followed claims by the U.S. ambassador in Pretoria that the purpose of a clandestine visit to a South African port by a Russian vessel was to load arms. This put severe pressure on the rand.
A South African judicial commission could find no grounds to support the allegations, and no U.S. agency has provided evidence. The prospect of sanctions has receded, though South Africa’s stance toward the continuing Russia-Ukraine war will be monitored by the United States.
Falling mineral prices contributed largely to lower-than-expected government revenue in the first and second quarters. Continuing power cuts and logistics bottlenecks caused by dysfunctional freight rail and port services are also factors in the expected revenue undershoot for the year. Neither is expected to see speedy resolution, despite temporary respite from outages at midyear.
Tax collections fell ZAR22 billion short of budget projections for the first five months of the year; however, economists’ estimates of the shortfall for the year vary from ZAR20 billion to ZAR80 billion. Extrapolating the figures for the first five months would lead to a shortfall of ZAR53 billion.
While clarity awaits full figures for the year and the MTBPS in November, economists are currently predicting a 2023 deficit of 4.5% to 6.5% of GDP, as against the February budget forecast of 4% and a borrowing requirement of up to ZAR600 billion as against the Treasury’s forecast of ZAR515 billion. The IMF sees the deficit rising to 6.3% and warns that, without drastic stabilization, debt will climb from the current 72% of GDP to 85% in 2028 to 2029.
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The government remains divided on the prospects for a basic income grant to mitigate the effects of long-term high unemployment. The budget extended for a year the social relief grant introduced to alleviate COVID-related hardship. However, pressure for a permanent grant will continue as the ANC approaches its national conference in December and the 2024 election, in which it may fall below 50% of the vote for the first time.
