Previous Quarterly Editions
Expropriation Risk: 56 56 53 52 ► Political Violence Risk: 51 51 51 49 ▼ Terrorism Risk: 30 30 30 28 ▼ Exchange Transfer and Trade Sanction Risk: 55 45 45 45 ► Sovereign Default Risk: 75 75 83 47 ▼
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Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
South Africa’s economy is highly energy intensive and concentrated at the levels of producers, consumers and sources of fuel. Eskom, the state-owned energy utility, accounts for 95% of electricity generation. Of this, an estimated 77-88% is produced by coal, with many of the country’s coal plants ageing and fault-ridden.
Coal makes an important though declining contribution to the South African economy, accounting for 1.9% of gross domestic product (GDP) in 2021. Moreover, 28% of coal production is exported, equal to 4.6% of all exports in 2020; South Africa is the world’s fourth largest coal exporter. As of 2019, more than 90,000 people are employed in coal mining.
Employment in coal mining is politically important, given record unemployment which is currently at 34.9% (44.6% by extended definition). While only 0.7% of those in formal employment are coal miners, each mining job supports five to ten people, according to mining industry employers’ association. The National Union of Mineworkers is the largest affiliate to the African National Congress (ANC)-aligned Congress of South African Trade Unions (COSATU) labour federation, a key component of the ANC alliance and key supporter of President Cyril Ramaphosa.
South Africa is currently the twelfth largest emitter of greenhouse gases. The country is particularly vulnerable to climate change, including increasing extreme weather events, threats to agriculture and food security and reduced water availability in an already largely arid region. In the interior, warming is occurring at twice the global average rate. Climatic conditions favour development of renewable energy given the levels of sun in the remote and arid Northern Cape and wind in the Eastern Cape.
The Integrated Resource Plan is a response to the convergence of South Africa’s energy situation and global pressures. The plan envisages a more diverse energy mix by 2030, with increased roles for renewables and a corresponding decline in coal’s share, reducing South Africa’s unsustainable fossil fuels reliance.
As a Paris Accords signatory, South Africa is committed to five-yearly progressive updates of Nationally Determined Contributions plans to mitigate global warming. The September 2021 update contains significantly accelerated mitigation targets.
The increasing urgency with which climate issues are being treated globally is reflected in South Africa. Key points of political dispute include how to achieve a ‘just’ green energy transition that minimises effects on vulnerable mining communities. South Africa’s ability to continue pursuing development goals (such as infrastructure and tackling unemployment) and funding them also needs to be protected.
Further considerations include what contribution Eskom will make compared with independent power producers in future, the governing party’s ingrained statism, unions’ power and the need for state entities to further affirmative action in the labour market. The country has just one nuclear plant, which will operate until 2044. Finally, external financial aid agreed at the COP26 international climate meetings of 2021 is still subject to negotiation.
Minerals and Energy minister Gwede Mantashe is pivotal to these issues. He is not a climate crisis denier but is a force for what he calls “pragmatism”. For Mantashe, this means slowing down transition, emphasising gas and nuclear power where possible, scepticism about the role of the private sector in energy provision, and seeing emissions mitigation from a broad, societal and developmental perspective.
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In December 2021, the ANC failed to achieve the two-thirds majority required to amend section 25 of the constitution. The amendment sought to make explicit and emphasise the legitimacy of expropriation without compensation as a key mechanism for accelerating land reform.
Even if the amendment had passed, expropriation without compensation would have required a new expropriation act since under the constitution, expropriation can only take place under an act of general application. Existing legislation dates from apartheid-era 1975. Repeated efforts to pass new legislation have foundered.
A new bill is expected to come before parliament, potentially this year, following cabinet approval. The bill provides for five conditions under which no compensation may be paid for land, including the most controversial condition of owner’s main purpose is to benefit from market appreciation of the land’s value. These conditions do not currently apply to other property, but could later.
The bill will probably again be too narrow for some parties. However, as an ordinary bill, it will require only a 50% majority. Despite this, it will be closely scrutinised for alignment with the constitution and its passing could be held up by court action. If it is postponed beyond the 2024 general election, complications could arise if the ANC vote falls below 50%.
The February 2022 report of an official inquiry into the July 2021 unrest confirmed that intelligence failure and indecisive and poorly coordinated political and security force leadership contributed greatly to the death toll of more than 300 and disruption of mainstream economic activity.
The reform of the police and intelligence services has continued. The police remain burdened with the legacy of corruption and factional capture from the Zuma years; improvement will be slow and uncertain.
Weak growth and continuing record levels of unemployment will provide fertile ground for social media warfare, misinformation and false news that characterise ANC factional conflict and contributed to 2021’s unrest. Prosecution of ANC officials relating to state capture issues will raise the chances of future unrest outbreaks.
Sporadic assassinations of local-level ANC officials and aspirant candidates are related to factional competition for patronage. Such murders are likely to increase as the party’s five-yearly national elective conference approaches in December. The fragile condition of state resources will continue to contribute to instability.
In early March, the U.S. Treasury’s Office of Foreign Assets sanctioned four South Africa-based individuals, alleging they acted as financial conduits for Islamic State terrorism across Africa. One of the four was indicted on charges related to 2018 terrorist acts in KwaZulu-Natal, but the case was struck in 2020 on the grounds of undue prosecutorial delay. The international watchdog, the Financial Action Task Force has given South Africa 18 months to address terrorist money laundering, failing which the country will be ‘grey-listed’. This would have serious implications for South Africa’s international economic relationships.
South African interest and exchange rates have continued to be supported by higher commodity prices, reflected in a largely well-received February budget. Economists remain divided on how long this cyclical phase will last, although metal prices (for instance, palladium) spiked even higher in the first week of the Russia and Ukraine crisis, and there are some forecasts of continued support for gold and platinum group metals if the sanctions are prolonged.
However, the uncertainty over the timeline for reduction in monetary stimulus by the U.S. will put pressure on the rand above the ZAR15:USD1 mark. Fears of an economic slowdown in the eurozone, South Africa’s largest export market, feature in pessimistic scenarios.
The February budget forecast 2021 growth is at 4.8%, down from the 5.1% projected in October’s medium-term budget, while the 2022 growth is forecast at 2.1% with 1.8% average for the following three years. However, International Monetary Fund forecasts are lower: 4.6% in 2021, 1.9% in 2022 and an average of 1.4% in the medium term.
February’s budget used a substantial portion of the estimated 180-billion-rand tax overrun (which could ultimately prove higher) to pay down debt. Public debt is forecast to peak at 75.1% of GDP in 2024-25. Treasury officials forecast that South Africa will achieve a primary surplus in 2023/24, a year ahead of target. Better growth performance, rather than merely expenditure containment, will probably be needed for this.
At the end of February, the Constitutional Court ruled in favour of the government in the matter of its refusal to implement the final tranche of its 2018-20 public service wage agreement. Had the decision favoured the unions, the budget, presented only one week before, would have been thrown into complete disarray by an obligation to find 75.6 billion rand in back pay. Public servants have now had their wages frozen for two years, albeit with a 1000-rand-per-month non-pensionable supplement granted last year.
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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.
