Previous Quarterly Editions
Expropriation Risk: 65 66 66 67 Political Violence Risk: 47 48 46 46 Terrorism Risk: 28 30 30 30 Exchange Transfer and Trade Sanction Risk: 48 48 50 49 Sovereign Default Risk: 45 46 46 49
TREND ▲ OUTLOOK ▲
Although he led the ANC to victory in May’s general election, albeit with a lower share of the vote than in 2014, it is still not clear how much backing President Cyril Ramaphosa has within the party, or the country, for pushing forward with major economic reforms. These reforms are widely regarded, both at home and abroad, as crucial steps if the ongoing fiscal crisis is to be tackled by growing the economy. As ever, the troubled electricity utility Eskom is at the top the agenda, serving as a demonstration of why reform is so needed and also why it is so hard to achieve. In late July, finance minister Tito Mboweni announced a second major bailout for Eskom, this time of 4.25 billion dollars over two years to follow the three-year, 4.9-billion-dollar package that was originally allocated earlier in the year. Mboweni warned that the government may have to increase its borrowing and/or raise taxes as a result of the new bailout. Details are scarce about the government’s latest turnaround plan for Eskom, especially on how the need to trim the workforce will be met in the face of union solidarity. Phakamani Hadebe, who served barely a year before leaving in July, was Eskom’s twelfth CEO in a decade. A former Treasury official who headed the Institute of Chartered Accountants has been given the role of chief restructuring officer, but the business community was hoping for a political heavyweight who could support Ramaphosa from within the company. The current chairman has taken on the CEO role temporarily, creating corporate governance concerns. Meanwhile, President Ramaphosa, who is also preparing an ambitious push to reform the country’s healthcare system, remains under pressure from supporters of his ousted predecessor, Jacob Zuma. The Public Protector, a Zuma appointee whose motivations have been widely questioned, has been pursuing both Ramaphosa and his reformist minister of public enterprises, Pravin Gordhan, well known as a Zuma critic. In the face of these and other political headwinds, progress has been slow in delivering growth-friendly policies across the economy even as official figures show unemployment at almost 30%. The economy grew by 3.1% quarter-on-quarter and 0.9% year-on-year in the second quarter, more than expected and mostly due to growth in the mining sector. This allowed the economy to avoid a technical recession, and the government still suggests that growth will be 1.5% this year. However, any new setback at Eskom could push down growth in the second half and the central bank’s projection of 0.6% is widely seen as more credible.
TREND ▲ OUTLOOK ►
An ad hoc parliamentary committee is now drafting an amendment to the constitution that will allow expropriation of land without compensation, with their work to be completed by March 2020. An advisory panel on land reform that began work last year has already stressed that property rights are a central aspect of the constitution and that the use of expropriation without compensation should only take place under tightly defined circumstances. Ramaphosa must now balance demands for land expropriation from within the ANC with the likely risk to economic confidence.
TREND ► OUTLOOK ▲
Although the ANC’s victory in May has reduced the risk of explicit political violence, low-level incidents related to ANC factionalism, industrial disputes, and localised protests over poor delivery of public services will continue. Of greater concern is the political fallout from escalating criminal violence, especially related to organised criminal gangs. South Africa’s high murder rate more than halved between 1994 and 2011 but is now growing again. A new concern is the spike in homicides in the ‘Cape Flats’ townships surrounding Cape Town. In July, the minister of police announced that soldiers were being deployed there to support the police, indicating that the state has lost control of the area to criminal gangs.
TREND ► OUTLOOK ►
Unlike other countries in Africa that have experienced terrorist incidents, South Africa is geographically distant from the strongholds of major international terrorist groups. As a result, in practical terms it is not an easy target, and the ANC’s legacy of anti-colonial structure also suggests that it may not be a high-profile target. The Ramaphosa government’s ongoing reorientation of the security services from a domestic focus to anti-terrorism work should strengthen the capacity to identify and track any attempt to use South African territory for planning attacks on other countries.
TREND ▼ OUTLOOK ▲
The reappointment in July of Lesetja Kganyago for a second five-year term as central bank governor was accompanied by the appointment of two experienced bank insiders to deputy governorship vacancies. This was welcomed by the business community as Kganyago is a staunch defender of central bank independence and the primacy of inflation targeting. However, President Ramaphosa will continue to face calls from economic populists to make the bank subject to political direction, as well as calls for quantitative easing. In July, the bank made its first rate cut of the year, from 6.75% to 6.5%, as inflation remains well within its 3-6% target range. However, it reiterated the need for prudent macroeconomic policies and structural reforms as it cut its growth forecast for 2019 from 1% to 0.6%. Meanwhile, low growth, contingent liabilities related to Eskom and other state-owned enterprises, and the difficulty of achieving reform will all maintain pressure on the rand, which was pushed lower in August by the latest Eskom bailout.
Moody’s, which is the only major rating agency to retain an investment grade for South Africa’s sovereign debt, called July’s Eskom bailout package ‘credit negative’ and questioned the government’s ability to manage the costs of extended support to Eskom, while Fitch changed its outlook rating for South Africa from ‘stable’ to ‘negative’. The main concern in both cases is not so much government spending as the lack of growth to finance it. The government is budgeting for a debt-to-GDP ratio of 60% by 2021-22, but anaemic growth means that the figure is likely to be closer to 70%. In August, government spokesmen had to fend off speculation that South Africa is now considering an IMF bailout. While this is unlikely in the near future, the hard political choices involved with such a move may become more urgent in 2020.
Return to contents Next Chapter