Previous Quarterly Editions
Expropriation Risk: 67 64 65 66 Political Violence Risk: 46 47 47 48 Terrorism Risk: 26 26 28 30 Exchange Transfer and Trade Sanction Risk: 49 47 48 48 Sovereign Default Risk: 45 43 45 46
TREND ▲ OUTLOOK ►
President Cyril Ramaphosa continues to be hampered by the narrowness of his victory in the December 2017 contest to head the governing ANC. His precarious position within his own party still forces him to balance the need to shore up his base inside the ANC with regaining the confidence of domestic and foreign investors. In terms of investor confidence, the key tasks have been to restore good governance and consolidate public finances, which means rehabilitating the state-owned sector of the economy and laying the foundations for accelerated growth. Ramaphosa has made progress by acknowledging the nature and extent of South Africa’s economic crisis, by beginning to tackle the corruption that became endemic under his predecessor, Jacob Zuma, and by restoring a working relationship between the government and the business community. He has also appointed people of integrity and capacity to key state offices while keeping some of Zuma’s faction with strong ANC connections in his cabinet. The ANC goes into the 2019 legislative elections, which must be held by mid-year, depending on Ramaphosa’s personal appeal to help it avoid the losses that would have been inevitable under Zuma. He is campaigning on increasing employment and an improving economic situation, although it is clear that public dissatisfaction with the state of the economy remains entrenched. After two quarters of recession in the first half of 2018, growth rebounded to 2.2% in the third quarter and the final figure for the year is likely to be 0.7%. Despite these encouraging signs, there are several significant political and economic risks ahead in 2019. These include the uncertainty generated by the pending constitutional change that will permit the expropriation of land without compensation, the difficulty of reforming the SOE sector, and the possibility that South Africa may lose the sole remaining investment grade rating for its sovereign debt. Structural economic reforms cannot be expected unless and until Ramaphosa, who stepped up from deputy president when Zuma resigned in February 2018, wins a substantial personal and party mandate. Even if he does, he will face formidable opposition from trade unions, ANC factions, and others as he tries to pursue reform. The latest strikes in the important gold mining sector have underlined the fact that rising wage costs, the high cost of borrowing, and the increasing capital costs of mining at ever-greater depths present an almost insurmountable challenge for the industry. Production will continue to contract, with mounting job losses that risk contributing to social unrest.
TREND ▲ OUTLOOK ▲
A draft bill to provide for the expropriation of land without compensation is due to be put before parliament by the end of March. President Ramaphosa has said that land reform will be accelerated, but in ways that will stimulate rather than reduce growth and will respect due process and avoid land grabs. The threat to the economy involves a reduction in agricultural output and damage to a banking sector in which many loans are secured by land ownership. Despite the president’s assurances, investors are expressing considerable concern about government intentions, capacities, and financial resources to manage and support land redistribution on any significant scale. Since 2008 the government has been trying to pass some version of a bill that would provide for land expropriation without compensation in certain circumstances. It has encountered a prolonged range of procedural and legal obstacles, and the current effort to bring this aspect of land reform about by constitutional amendment and subsequent enabling legislation may yet go the same way. If so, however, the popular response is likely to be more vociferous than in the past.
Outbreaks of violent protests continue across the country, usually triggered by municipal corruption or the poor delivery of public services, but these tend to be localised and do not threaten mainstream economic activity. Recently released police figures show that 62 white farmers were murdered in 2017-8. Although there is a debate over whether these killings are political or racial in nature, or simply represent ordinary crime, instances of antagonistic rhetoric from political parties and pressure groups against whites and Indians are increasing. This has not yet led directly to racial violence, but it is adding to an increasingly volatile political atmosphere.
The country remains an unlikely target for terrorist attacks, whether from domestic or international groups. The Ramaphosa government’s ongoing reorientation of the security services from domestic factional spying to focus on anti-terrorism work should strengthen the capacity to identify and track any attempt to use South Africa as a place from which to target another country.
In January, President Ramaphosa had to move quickly to reassure the business community when the ANC election manifesto included a pledge to make the central bank include objectives such as employment creation and contributing to growth when making policy decisions. In November, the bank raised its benchmark interest rate from 6.5% to 6.75%, the first rise for more than two years. The volatile rand remains under pressure from external factors that include a strong dollar, the prospect of global trade disruption, and general investor concerns about emerging markets, as well as from domestic factors.
Although South Africa’s net debt ratio is around 50% of GDP, its gross public sector debt ratio is closer to 70% because the government must guarantee almost half of the combined debt of all the country’s SOEs. Eskom, the state electricity monopoly, is now borrowing just to meet its interest payments. In December, Eskom’s chairman suggested that the government should take on seven billion dollars of Eskom's debt, a move which would increase Pretoria's debt-to-GDP ratio. Finance minister Tito Mboweni responded by telling Eskom to go to the bond markets for new financing. However, the government is aware that Eskom must be turned around because a reliable energy sector is crucial to sustaining any broader national economic recovery and vital to any improvement in investor sentiment.
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