Previous Quarterly Editions
Expropriation Risk: 66 67 69 70 Political Violence Risk: 46 46 48 50 Terrorism Risk: 30 30 30 30 Exchange Transfer and Trade Sanction Risk: 50 49 50 53 Sovereign Default Risk: 46 49 51 55
TREND ▲ OUTLOOK ▲
By the end of March 2020, almost half of the country’s COVID-19 cases were in its most populous and economically important province, Gauteng, which includes Johannesburg. President Cyril Ramaphosa ordered an initial three-week lockdown on March 23 (2020), shutting businesses, imposing working from home, and placing severe restrictions on movement. The measures were enforced by a heavy security presence. It was already clear that the increased demand on South Africa’s already stressed public health resources would require sharing resources between private and public health sectors, and would affect prospects for the projected national health insurance scheme. The global and local effects of COVID-19 will weigh heavily on South Africa’s economic prospects by lowering growth, curtailing tourism, and disrupting supply chains with China, which is South Africa’s biggest single trading partner. Against this background, in late March 2020, Moody’s became the last of the three main ratings agencies to downgrade South Africa from investment grade status. The combination of virus-related disruption and reduced access to capital resulting from the downgrade will greatly worsen the already serious condition of public finances. The last quarter of 2019 saw recorded negative growth for the second successive quarter, pushing the country into recession for the second time since 2018, and growth has been on a negative trend since 2011. The government’s budget in February 2020 for the new fiscal year that started in April 2020 had already reported deteriorating projections on all important metrics compared to the figures presented in the medium-term budget policy statement in October 2019, as well as a lowered growth projection for 2020. The February 2020 forecast has the budget deficit for fiscal 2020-21 at 6.8% of GDP, government debt at 71.6% of GDP and growth below 1%. The budget aims to make substantial savings in the public sector wage bill by not implementing the final year increase of the current three-year wage agreement, but the unions opposed the move vigorously. The dispute is likely to move to the courts when the bargaining process is exhausted, but the risk of strikes and disorder has been reduced by the lockdown order and widely shared concern about the virus. In one relative piece of good news, the virus crisis has eased the pressure on state power utility Eskom, which was still implementing power cuts in the first quarter as its new CEO prioritised essential maintenance that is long overdue. However, during one week in March 2020, a quarter of its generating capacity experienced unplanned breakdowns. At the same time, falling demand is also impacting revenue, worsening the company’s debt situation, and plans to unbundle generation, transmission and distribution are likely to be pushed back. In April 2020, the government ruled out seeking a structural adjustment programme from the IMF, something that is not strictly necessary in balance of payment terms and would probably come with politically toxic conditions. However, it will look for assistance related to the virus outbreak and will need to look for additional outside help sooner rather than later.
TREND ▲ OUTLOOK ►
The adoption of a constitutional amendment enabling expropriation of land without compensation has been delayed by the COVID-19 pandemic. However, once adopted that amendment will need to be followed by specific and detailed enabling legislation, and this will likely prove difficult to enact. Despite efforts stretching back more than ten years, the government has so far been unable to develop legislation that satisfies both the constitutional requirement for ‘just and equitable compensation’ and the demands of ANC factions for expropriation without compensation. The major challenge is the insistence of the ANC’s National Executive Committee that power to determine compensation, including providing no compensation, should be held by the executive rather than the courts. Intense debate will continue over the practical and political issues raised by expropriation without compensation, with the ANC keen to press on at a time when the government’s ability to finance the process is clearly limited. Meanwhile, the credibility of President Ramaphosa’s assurances that policy compromises can be negotiated to resolve all the conflicting aspects of the issue are being undermined by the ANC’s attempt to remove the judiciary from the process.
The government’s attempt to withhold the final year increase due under the three-year wage deal with public sector workers that expires in April 2021 would normally have risked major strikes and disruption, but the restrictions on movement and assembly related to COVID-19 mean that protests will be averted at least in the short term. However, the political optics of denying an approved pay increase to people on the front lines of the battle against COVID-19 appears to have led the government to hesitate. South Africa is used to political protests over the poor state of public services, and while these are usually localised, this partly explains the heavy security presence being used to enforce the government lockdown.
TREND ► OUTLOOK ►
Although South Africa is readily identified with the West despite the ANC’s revolutionary history and has many tempting urban targets, its geographic distance from terrorist strongholds minimises but does not entirely dispel the terrorist threat. However, President Ramaphosa’s efforts to rehabilitate and reorganise South Africa’s intelligence agencies from their use for domestic political purpose during the Zuma era has been slow and contested. This could compromise the country’s ability to detect and pre-empt potential terrorist operations.
The rand remained under pressure during the first quarter of 2020 as a result of continued low growth, deteriorating fiscal metrics and then the global impact of COVID-19. On the day after the Moody’s downgrade, the rand reached a record low of over 18 to the dollar (USD) in intra-day trading. Fuller effects will be felt when institutional investors are forced to sell South African bonds following the country’s removal from important global bond indices in May 2020; foreign investors currently hold more than a third of the South African bond market. The central bank cut interest rates by 1% in both March 2020 and April 2020 to reach a record low of 4.25%, after which the rand slipped further.
Debt servicing costs now absorb 15% of tax revenue and are the fastest growing item in government expenditure. The budget deficit in the fiscal year just started will be the highest since 1992-3, which was the height of political turmoil and violence as well as a time of profound economic uncertainty. Government guarantees of debt owed by state owned enterprises (SOEs) remain the biggest threat to fiscal integrity. Of the total debt of the seven biggest SOE borrowers, the government guarantees almost two-thirds, with Eskom accounting for half of that responsibility. The COVID-19 crisis will inevitably increase public debt as the government in Pretoria, as in other countries, incurs massive expenditures to shore up the economy.
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