Index Trend Previous Quarterly Editions
Expropriation Risk: 57 ▲ Political Violence Risk: 48 ► Terrorism Risk: 26 ► Exchange Transfer and Trade Sanction Risk: 45 ► Sovereign Default Risk: 65 ►
Overall Risk Temperature TREND ►
Special topic: Protest intensity in 2022 and Q1 2023* 2022 Q1 2023 Medium Low All protest: Very High Medium
Cost-of-living protest risk in 2023* Medium Medium
*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 calculations, see the introductory essay.
In 2022, South Africa’s average annual inflation rate of 6.9% was the highest for 13 years. In February 2023, four months of falling inflation halted with a slight rise from 6.9% to 7%. Food and energy prices were the leading contributors to these high figures: food inflation accelerated by 11.5% in August 2022, reaching 14% year-on-year in February 2023. The price of petrol increased from ZAR19.61 per litre in January 2022 to ZAR26.74 in July, before falling again to ZAR22.70 in March 2023.
The South African population is particularly vulnerable to inflation because of very high levels of unemployment and poverty. Poorer people spend a much higher proportion of their income on food than more affluent consumers. As a result, South African Reserve Bank inflation targeting is central to economic policy and a target for populists who advocate a more expansive economic policy.
Targeted social assistance schemes lead the government’s response cost-of-living stresses. According to the finance minister, Enoch Godongwana, 46% of South Africans 29 million-strong population receive at least one social grant, although this figure includes recipients of the temporary COVID-19 grant. In the face of rising living costs, the government has extended the temporary COVID distress grant until 2024 at least. Government concern over debt and deficit stands in the way of further permanent extension of social security, although fears for the ruling African National Congress (ANC)’s electoral prospects in May 2024 may overcome this.
The government regulates the cost of fuel and subsidises by temporarily adjusting the amount of tax and levies paid on it. Taxes and levies – a major source of government revenue – account for more than 26% of cost to the consumer.
Electricity cost is regulated by NERSA (National Energy Regulator South Africa). NERSA has granted ESKOM, the state power utility, an 18.65% increase from April 1, despite President Cyril Ramaphosa calling for postponement. The hike will stoke inflation.
Electricity prices are caught in a vicious cycle of cause and effect. Municipalities owe ESKOM ZAR56.3 billion, up from ZAR44.8 billion in March 2022. However, consumers owe municipalities ZAR140 billion for services. It is unclear how much of the latter is ‘cannot pay’ through poverty, or ‘will not pay’ through illegal connections and/or some form of political protest. Newly appointed Deputy President Paul Mashatile referred in parliament to a “culture of non-payment.” Raising prices by over 18% is likely to make this situation worse.
Austerity is similarly driven by a trade-off between public service wages and all other components of departmental budgets. Promises to curb the wage bill, which accounts for around one third of expenditure and almost 15% of GDP, have been central to treasury plans to restore public finances. Public service unions leveraged influence in the ANC alliance and divisions in successive cabinets to obtain above-Consumer Price Index wage settlements for more than a decade after 2008.
However, allocations to national and provincial departments employing public servants were not increased correspondingly, so headcounts and services were cut, especially in recent years. Effectively, those with political bargaining power were able to protect their interests at the expense of the consumers of public services, especially the poor.
Since 2019, the government has taken a harder line, resulting in a prolonged and bitter stand-off with the unions. However, a health sector strike in March this year saw the government cave in and significantly improve its wage offer. The Finance Minister has already warned a settlement above the government’s pre-determined expenditure ceilings would require further austerity measures.
Caught between fragile public finances, external pressures on the cost of living, self-inflicted wounds such as power outages, stagnating growth, fears for its electoral majority in the 2024 general election, and militancy from one of its best organised electoral bases, the ANC-led government has chosen to appease the unions at the risk of further deterioration in public services.
Although it will likely find temporary expedients such as social grant adjustments to alleviate continuing cost-of-living pressures and avoid large-scale civil unrest, the electoral calculation implied in the government’s increased wage offer may backfire, and no long-term solutions appear to be on offer.
Expropriation Risk 57 (Significant) TREND ▲
The National Council of Provinces – South Africa’s second parliamentary chamber – re-opened public comments on the much-delayed expropriation bill, which had been passed by the National Assembly on September 29, 2022, and would normally have been law by now – the concern is whether the law would fall foul of a constitutional challenge, as previous iterations did.
Comments closed on March 6. The bill sets out 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 main opposition party and other critics are concerned the bill allows transfers of expropriated land to take place before resolution by mediation or court proceedings over disputed compensation are complete. Other concerns are that property in the bill is not confined to land and can include movable and intellectual property.
More than 230 state entities may expropriate. Concerns are driven by exceptionally low trust in government in the aftermath of state capture revelations and widespread incompetence of state entities. Constitutional challenge to the new legislation is likely.
Political Violence Risk 49 (Medium) TREND ►
A strike in March by the National Education, Health and Allied Workers’ Union (NEHAWU) was accompanied by intimidation, harassment, and some violence, which contributed to the effective shutdown of many hospitals. This led to the government’s hasty U-turn to increase its public service wage offer. The strike was declared unlawful by the Labour Court insofar as many withdrawing their labour were ‘essential workers’ whose right to strike is severely limited.
A one-day stayaway organized by opposition party Economic Freedom Fighters (EFF) on March 20 was a protest against ESKOM’s load shedding and aimed at toppling President Ramaphosa. Given the EFF’s track record of violent intimidation, widespread unrest was feared. In the event, the stayaway was not well supported, and a massive security force presence was a successful deterrent. The event is widely regarded as a setback for the EFF (which gained 10.8% in the 2019 general election) and evidence of improvement in security forces’ capacity and preparedness, after their failure to anticipate, deter, and control the insurrectionary violence of July 2021.
Despite the hollowness of EFF threats to bring the country to a standstill and improved security force performance, the fragile condition of state resources will continue to contribute to instability in a general climate of lawlessness.
Terrorism Risk 28 (Low) TREND ►
The U.S. Embassy in Pretoria warned its citizens to avoid Sandton, Johannesburg’s financial centre, on October 29, 2022, citing a terrorist threat. There was no further information on timing, method, target, or potential perpetrator of the attack, which did not ultimately happen. There have been no new threats or instances of domestic terrorism since, and threat levels remain low.
South Africa’s grey- listing by the international agency the Financial Action Task Force for perceived laxity in dealing with transnational terrorist financing has already led to legislative improvements and further tightening of anti-terrorist policies. Better delivery of these policies can be expected as South Africa seeks to exit grey-list status.
Exchange Transfer and Trade Sanctions Risk 45 (Medium) TREND ►
Deteriorating terms of trade reflected in lower commodity prices, concerns for the global economic growth outlook, and rising U.S. interest rates continue to curtail risk appetite and are expected to remain in the medium term, maintaining pressure on South Africa’s currency.
From ZAR 14.47 in March 2022, the unit breached 18 to the U.S. dollar in mid-February, reaching a near three-year low of 18.6 on March 21. While inflation fears in the U.S. and Europe elevate interest rates there, and prolonged power outages depress South Africa’s economic growth, South Africa’s rand will remain under pressure.
Sovereign Default Risk 65 (Medium-High) TREND ►
Domestic problems include continuing power cuts and logistics bottlenecks caused by dysfunctional freight rail and port services. There have been power cuts every day in 2023 and on over 200 days in 2022. Outages will persist at least into 2024. The NEHAWU strike in March caused the government hastily to raise its wage offer for 2023-24 from 4.7% to 7%, closer to unions’ demands. of 10%. This will dent the government’s credibility. In February, rating agency Standard and Poor’s unexpectedly lowered South Africa’s outlook from ‘positive’ to ‘stable.’
In March, the IMF lowered its growth forecast for South Africa from 1.2% to 0.1%. The IMF predicts a fiscal deficit of 6.5% for fiscal year 2023-24 compared with the South African treasury’s budget forecast of 4%. The difference arises because the IMF treats ESKOM debt relief in the budget as ‘above the line’ capital transfer as opposed to the treasury’s categorization of ‘below the line’ debt. The IMF sees further deterioration in the deficit through 2025-26.
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.
