Previous Quarterly Editions
Expropriation Risk: 60 60 56 53 ▼ Political Violence Risk: 50 51 51 51 ► Terrorism Risk: 30 30 30 30 ► Exchange Transfer and Trade Sanction Risk: 45 55 55 45 ▼ Sovereign Default Risk: 75 75 75 83 ▲
TREND ►
The jailing of former President Jacob Zuma triggered widespread rioting, looting and attacks on communications and other infrastructure in July. Anti-constitution revolt and criminality were accelerated by economic grievances and hardship; serious failures of leadership in government exacerbated the situation. Unrest in KwaZulu-Natal and Gauteng caused over 300 deaths and an estimated ZAR50bn (USD3.3bn) of damage to the economy.
African National Congress (ANC) factional conflicts risk becoming an issue of internal security in which the resources, competence and reliability of the security forces -- which have long been matters of serious concern -- will be crucial. Zuma’s jailing, the suspension of ANC Secretary-General Ace Magashule and the shock of July’s violence have, at least in the short term, strengthened President Cyril Ramaphosa’s leadership hand. However, Zuma has been released from jail on undisclosed medical grounds and he has mounted a legal challenge to his sentence of 15 months for contempt of court. Unless there is swift progress in charging and jailing instigators of the unrest, Ramaphosa’s supporters will be disheartened, and his factional opponents invigorated.
Elsewhere, an interim agreement with public sector unions, awarding ad hoc increases pending fuller and longer-term negotiations, has at least staved off the prospect of damaging strike action. The unions’ challenge to the government’s unilateral repudiation of the third and last tranche of the previous deal is currently before the Constitutional Court. Victory for the unions would set back the government’s hopes of repairing public finances through curbing the ballooning public service wage bill.
Unemployment in the second quarter was measured at 34% of the workforce (7.8 million people), the highest since this measure was started in 2008. By the expanded definition, unemployment was 44.4%. The tally will probably rise again in the third quarter due to the July violence. By August 29, the official death toll from COVID-19 was 79,251 but excess deaths since March 2020 had reached over 244,846 by August 21, 2021. Only 10.8 million vaccinations had been administered by the end of August. Just under 5 million people were fully vaccinated out of the year-end target of 41 million (67% of the population). The programme accelerated to over 246,000 vaccinations each weekday by the end of August. However, even if this progress can be maintained, continuing tension between the public health imperatives of lockdown and its destructive economic effects can be expected.
The Constitutional Court has ruled that municipal elections cannot be postponed until February 2022 and must take place between October 27 and November 1, 2021. The independent electoral commission approached the court for a ruling following an inquiry led by a former deputy chief justice which recommended postponement on the grounds that COVID-19 restrictions would prevent elections being free and fair.
Production of ANC candidate lists were in great disarray and deadlines were missed. This was partly due to the party’s inability to pay its administrative staff. If the candidate process had not been re-opened, the ANC would have been at a significant disadvantage in the elections. However, the process was reopened; the opposition challenge in the courts was unsuccessful.
TREND ▼
Direct expropriation of foreign firms’ assets is not on the policy agenda of the government or the ANC for the foreseeable future. However foreign investors monitor legislation closely for any perceived erosion of property rights on the grounds that in practice the interests of domestic and foreign investors in security of property are difficult to separate.
The deadline for the ad hoc parliamentary committee on amending the constitution to allow for expropriation of land without compensation was extended to August 31. However, the ANC does not alone have the two thirds majority to amend the constitution. The second largest party, the Democratic Alliance, opposes the amendment and the ANC has been unable to secure the support of the populist Economic Freedom Fighters (EFF) to put together the requisite majority.
The EFF demands a much more radical amendment aimed at state custodianship of all land, effectively land nationalisation. There seems no immediate likelihood of the amendment being passed and Ramaphosa with his supporters will continue to grapple with the competing imperatives of land redistribution and economic stability, including investor confidence.
The July unrest represented a serious escalation over previous protest and strike-related violence, in destructiveness as well as political motivation and fallout. Endemic, if sporadic, violence has not previously disrupted mainstream economic activity in the way that the July events did, through destruction of infrastructure and communications networks.
Intelligence failure as well as indecisive and poorly coordinated political and security force leadership exposed the fragile condition of state resources. Reform of the intelligence services has been speeded up and the minister of defence has been shifted to another cabinet post.
However, the police remain burdened with the corruption and factional capture of the Zuma years, with no immediate prospect of improvement. It is unlikely that there will be a similar outbreak in the immediate future, but the chances and the stakes have been raised for the medium term. Weak growth and continuing record levels of unemployment will provide fertile ground for stoking by the social media warfare, misinformation and false news that characterises ANC factional conflict. For the foreseeable future, Ramaphosa will have only a flawed and uncertain shield against a rising risk of violence and subversion.
South Africa’s geographic distance from terrorist strongholds minimises the terrorist threat. However, the escalation of recent Islamic State-related operations in Cabo Delgado (northern Mozambique) led in late July to the deployment there of a Southern African Development Community (SADC) force of ground troops, including a South African component. Such involvement could raise the terrorist threat in South Africa itself.
South African interest and exchange rates have continued to be supported by higher commodity prices, although economists remain divided on how long this cyclical phase will last. However, uncertainty over the timeline for reduction in monetary stimulus by the United States will fuel rand volatility above and below the ZAR15:USD1 mark.
Growth projections of the South African Reserve Bank, market and international financial institutions converge between 4% and 5% off a low base for this year (the economy contracted 6.4% in 2020), dropping to between 2% and 3% in 2022 and between 1% and 2% in 2023.
TREND ▲
Higher than expected revenue from value-added tax receipts, corporate taxes and mining royalties have continued to support the February budget’s improved debt and revenue projections. Market economists are divided on how long elevated resource prices will last and which commodities will benefit.
By the time the October medium-term budget policy statement is delivered, the economic costs of the July unrest will be factored in. While ratings agencies do not see the unrest as having an immediate effect on South Africa’s sovereign and corporate creditworthiness, they point to medium and long-term effects on political stability and the durability of institutions.
Pressure on the government has been growing for the introduction of a basic income grant to mitigate the effects of long-term high unemployment. The government is divided on this question, but greater expenditure on an already high welfare commitment can be anticipated in one form or another of improved government revenue. The interim public sector wage adjustment has already diluted the government’s resolve to trim public expenditure. If the Constitutional Court finds in favour of unions, such plans will be in disarray. Talks on a new deal resumed in September.
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