Previous Quarterly Editions
Expropriation Risk: 67 69 70 67 Political Violence Risk: 46 48 50 47 Terrorism Risk: 30 30 30 30 Exchange Transfer and Trade Sanction Risk: 49 50 53 54 Sovereign Default Risk: 49 51 55 57
TREND ▼ OUTLOOK ▲
In mid-July 2020, as confirmed COVID-19 cases approached 375,000, President Cyril Ramaphosa announced that South Africa’s anticipated surge in the virus had arrived. As a response he reintroduced a ban on alcohol sales and a curfew running from 9pm to 4am which has few exceptions. Restricting alcohol sales remains contentious but figures from the ban earlier in the crisis showed that it reduced pressure on hospitals by reducing the number of alcohol-related admissions that required beds in trauma wards and intensive care units. The government had reduced restrictions across the country at the start of June 2020 to allow most economic activity to restart, after two months in which the early distribution of cases was heavily concentrated in the Western Cape. But by the end of June 2020, this province accounted for less than half of the country’s cases, while Gauteng, which includes Johannesburg and Pretoria, quickly came to have a quarter of all cases. By July 2020, healthcare systems nationwide were beginning to buckle, with reports of insufficient beds and equipment and instances of institutional inefficiencies increasing pressure on the government as its scientific advisers projected 40-45,000 deaths between June and November 2020. While it is not clear how the country’s high rates of tuberculosis and HIV infection are affecting death rates, the very high rates of diabetes and hypertension will be significant co-morbidities. The government has been grappling with the need to balance its goal of minimising health effects with the need to relax lockdown and allow economic activity in the face of what looks likely to be a contraction in double figures for 2020. The stringent conditions on the sale of alcohol and a ban on sale of tobacco products have been particularly controversial and the sometimes brutal enforcement of regulations by the security forces has also attracted criticism at home and abroad. The government unveiled a stimulus package worth almost 30 billion USD in April 2020 that was funded by reprioritising spending plans from the current budget and emergency loans from the IMF and the BRICS’ New Development Bank (NDB). Official figures for the first quarter showed unemployment at over 30%, the highest ever, before the pandemic really struck. Estimates indicate that it will reach 50% later in the year, with widespread fears that many jobs will be permanently lost in post-COVID restructuring. An emergency budget tabled by finance minister Tito Mboweni in late June 2020 was met with scepticism by markets. Mboweni warned that unless the expenditure cuts he outlined were carried out, South Africa’s debt-to-GDP ratio could surpass 100% as early as 2024, with the government having no choice but to apply for a conditional IMF loan before that happened. Despite the warning, the chances of significant spending cuts remain slim. In the latest example of resistance to change, unions and the government have together agreed a plan to wind up the distressed national carrier South African Airways, and replace it with a new airline that will be considered a ‘national asset’ in a move that requires the government to commit up to 625 million USD in fresh funding and guarantee new loans. While jobs will be preserved, this looks likely to perpetuate the pattern of state-owned enterprises (SOEs) draining government resources, which does not bode well for the prospects of reforming and restructuring SOEs. The opposition, Democratic Alliance, should get a new leader in October 2020, but its effectiveness will remain limited, as the populist Economic Freedom Fighters (EFF), who have been notably quiet during the lockdown, may make more effort to exploit government vulnerabilities during the second half of 2020.
The COVID-19 pandemic has delayed adoption of a constitutional amendment that would enable the expropriation of land without compensation. A major concern for investors remains the insistence of the ANC’s National Executive Committee that the power to determine compensation, including the cases where no compensation is deemed appropriate, should be held by the executive rather than the courts. A newer source of worry is the possibility that private pension funds may be required to invest a percentage of their assets in the state sector. Given South Africa’s declining state capacity and recent history of state capture and corruption, critics fear that if pension funds are compelled to invest in SOEs in order to ease the government’s fiscal burden, this will amount to a form of expropriation. While not yet an official government policy, the costs associated with COVID-19 have triggered serious debate around the issue as the government continues to see infrastructure investment as the most promising route to growth.
The heavy-handed enforcement of lockdown restrictions seen in April and May 2020 has since eased, reducing the potential risk of serious protests against the curbs on economic activity. However, if a new wave of deaths in the coming months is seen to be the result of an unequal distribution of medical resources (especially if coupled with record levels of unemployment), it could trigger localised but violent protests. The government’s withholding of a pay increase, which was due in April 2020 to be the final year of a three-year public sector page deal, was challenged by the trade union and is now going through the courts and heading to arbitration- this should avert further strike action by public sector workers in the short term.
TREND ► OUTLOOK ▲
South Africa’s geographic distance from terrorist strongholds minimises the terrorist threat but does not entirely dispel it. However, the recent expansion of Islam State operations into Cabo Delgado in northern Mozambique brings terrorist bases closer. If Pretoria responds positively to Mozambique’s request for ground forces to combat terrorism there, this may elevate risk at home.
TREND ▲ OUTLOOK ▲
The rand remained under pressure during the second quarter of 2020, which is a result of continued low growth and deteriorating fiscal metrics as well as the global impacts of COVID-19. All of these factors are likely to bear on the currency for the remainder of 2020. Staunch opposition from the central bank to any use of quantitative easing, on the grounds that it would force up inflation and risk stagflation, means that the prospects for growth are very poor. However, pressure is building not only within the ANC but also among some mainstream economists for the government to persuade the central bank to change its position on this issue.
The government’s emergency budget in June 2020 projected a contraction of 7.2%, a budget deficit of around 15%, and a debt-to-GDP ratio of 81.8% by the end of fiscal 2020-21. It says that the ratio will peak at 87% in 2023-4 but only if current spending reduction targets are met. These include a reduction of eight billion USD in the public sector wage bill, which will be hard to achieve given entrenched opposition to cuts at the grassroots level of the ANC.
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