Previous Quarterly Editions
Expropriation Risk: 66 66 67 69 Political Violence Risk: 48 46 46 48 Terrorism Risk: 30 30 30 30 Exchange Transfer and Trade Sanction Risk: 48 50 49 50 Sovereign Default Risk: 46 46 49 51
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The latest medium-term budget statement from Finance Minister Tito Mboweni, which covers 2020-22, delivered a downbeat financial outlook in November. He downgraded the government’s growth projection to 0.5% for 2019 and indicated that revenue collection would be significantly below earlier estimates. In response, Moody’s, the only major agency still giving the country’s sovereign debt an investment rating, did not downgrade it but changed its outlook from stable to negative. Prospects for avoiding a debt trap and an IMF bailout, which is now being discussed as a real possibility inside as well as outside government, rest on the achievement of reforms that will stimulate growth, tackle the huge challenge posed by the unsustainable levels of state-owned enterprise (SOE) debt, and put real controls on government expenditure. Yet Ramaphosa’s ability to enact such reforms is still constrained by his fragile hold on the ruling ANC, in which patronage lobbies and residual supporters of former president Zuma are still influential. A similar obstacle is the unwillingness of trade union partners in the ANC Alliance to contemplate privatisation, job and wage cuts, and labour market reform. Even if the economic crisis does produce some movement in sentiment within the Alliance, there will be no exception to the rule that all policy proposals must be extensively debated in party and Alliance structures before they can be implemented. Meanwhile, Ramaphosa’s government is taking what steps it can. A deadline has been set for the first phase of unbundling the electricity supply monopoly Eskom, which required a further bailout in mid-2019. Its debt of 30 billion dollars remains the biggest threat to the integrity of public finances. However, any serious attempt to cut spending on public sector wages will meet strong opposition from the unions. Government figures show that 35% of all governing spending, and 46% of all tax revenue, goes to pay public servants, in part because of a series of above-inflation, three-year wage agreements. As the most recent was concluded in 2018, negotiations will take place during 2020 for the agreement that will start in 2021, creating a running problem for the government. The National Treasury has floated ways of curbing expenditure without job cuts, including below-inflation increases, but these have already met with adamant refusal. Official figures show that unemployment ended 2019 at almost 30%, the highest level for a decade, and is close to 40% when discouraged job seekers are included. The government’s new ‘Energy War Room’, created in December to try and manage further electricity blackouts as yet another CEO starts at Eskom, will be closely watched.
TREND ▲ OUTLOOK ►
The parliamentary committee charged with drafting a constitutional amendment to allow the expropriation of land without compensation is due to report at the end of March. Until then, intense debate will continue over the practical and political issues that this has raised, not only in the relationship between property rights and redress but also the question of how to finance land reform in a time of fiscal crisis. President Ramaphosa’s assurances that policy compromises can be negotiated to resolve all these conflicting priorities and potential pitfalls will not be tested until the committee reports. The damaging strike at South African Airways (SAA) in November over wages and job cuts showed the extent to which the carrier has become vulnerable to the combination of a lack of investment and union pressure. It remains an example of the continuing government failure to tackle the state of SOEs, and the continuing risk that it could cease operations in 2020 will be noted by foreign investors, particularly those looking at the government’s new efforts to expand vehicle production in the country. The government is also beginning to look at gas, and particularly LNG imports, as a means of reducing the current reliance on coal for electricity production, and this may have some impact on Eskom’s future. More positively, Ramaphosa’s anti-corruption efforts are gaining some momentum.
Political protest remains endemic in South Africa, mainly in the form of demonstrations over the poor state of public services. Limited outbreaks of violence linked to strike action are also common. Such examples of political violence, insofar as they are planned at all, usually have very specific and localised goals. However, the xenophobic violence directed against those perceived to be undocumented immigrants or asylum seekers in South Africa’s cities, which was a feature of 2019, is also a form of political violence and is rooted in the frustrations of township life. One political consequence of this violence has been to further erode South Africa’s diplomatic capital and soft power on the African continent.
TREND ► OUTLOOK ►
To the extent that there is a terrorist threat in South Africa, it is driven by global and not local factors. Although South Africa is readily identified with western materialism and has tempting urban targets, cooperation with western intelligence agencies, the rehabilitation of South Africa’s own intelligence services after the challenges of the Zuma era, as well as its geographic distance from terrorist strongholds, minimises but does not entirely dispel the terrorist threat.
TREND ▼ OUTLOOK ▲
The rand fell by 5% against the dollar in the months preceding the medium-term budget statement in October. Although that statement did enough to prevent a downgrade by Moody’s, the sense that this is less of a vote of confidence and more a postponement until after the February budget statement means that the currency will remain under pressure. Headline inflation, which averaged just over 4% in 2019, is expected to be around 5% in 2020.
The government’s latest projections show the budget deficit averaging above 6% over the next three years, and the debt-to-GDP ratio above 70% by fiscal 2022-23. Moody’s decision to withhold a downgrade is, in effect, an ultimatum to the government to develop a credible fiscal strategy that can contain the rise in debt and unveil it in the February budget statement. This will not be possible without a serious reduction in the government wage bill, either through negotiation or confrontation, but a downgrade will result in huge capital outflows.
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