Previous Quarterly Editions
Expropriation Risk: 67 67 64 65 Political Violence Risk: 47 46 47 47 Terrorism Risk: 26 26 26 28 Exchange Transfer and Trade Sanction Risk: 48 49 47 48 Sovereign Default Risk: 45 45 43 45
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Cyril Ramaphosa’s presidency continues to reflect the narrowness of his victory in the ANC presidential election last year. Figures associated with the former president, Jacob Zuma, including Vice President David Mabuza, remain active in ministries and within the ANC. With a general election due by May 2019, Ramaphosa is putting a premium on party unity and hopes to strengthen his own mandate by providing a convincing ANC victory next year. This means that progress on the major structural reforms needed to return South Africa to fiscal security and sustainable growth is unlikely before the middle of 2019 at the earliest. In the meantime, Ramaphosa must contend with current ANC policies that range from the insistence of its populist wing for land expropriation without compensation to a push from the unions for a national health insurance scheme. In August, he announced a stimulus package to address unemployment and low growth, although its core elements have been tried before with only limited success. Current global pressures on the rand include dollar strength, emerging market risk aversion, and concerns that protectionist trends and trade wars will affect global trade and growth to the detriment of medium sized and open trading economies such as South Africa. Slow growth, political risk and high unemployment are among the most important domestic factors bearing on the rand. In the first quarter of 2018 South Africa’s GDP contracted by 2.2%, the biggest shrinkage since 2009. Most forecasts for GDP growth for 2018 and 2019 are lower than population growth. After the relief engendered by Zuma’s replacement with Ramaphosa, political risk has re-emerged, driven by fears that expropriation of land without compensation will put all property rights in jeopardy and threaten the integrity of a banking system to which farmers are very heavily indebted. Unemployment in 2018 has shown little change from the level in 2017, remaining above 25%, and the expected growth of 1% in 2019 will do little to bring it down. Eskom, the state-owned power company, posted another annual loss in July and has 16.5 billion dollars of debt coming due in the next five years. However, after another change of leadership, in August it was able to secure a loan of 2.5 billion dollars from the China Development Bank. Moreover, despite recent downgrades by rating agencies, it has been able to place another one billion dollars of government-secured debt on international markets. Part of Eskom’s problems relate to the economic slowdown, the low electricity tariffs mandated by regulators, and cost overruns on capital projects, but employee numbers have risen by 40% over the last decade even as electricity production has fallen by almost a quarter. A new three-year pay deal reached in August will see workers receive a 7% raise each year. Without major corporate restructuring, which is politically very difficult, responsibility for Eskom’s debt will remain a major drag on government finances.
In late July, President Ramaphosa announced in a broadcast to the nation that the ANC proposes to amend Article 25 of the Constitution, which protects private property, in order to clarify the conditions under which expropriation without compensation (EWC) can be implemented. Although the statement specified land, it omitted the qualifications and reservations that the president himself has had about the idea of EWC since it became ANC policy at the party’s national conference at the end of 2017. With Ramaphosa clearly under pressure on the issue, there is concern that ‘clarify’ actually means ‘extend’, which would cause great uncertainty for organised agriculture and the banking sector. Senior ANC officials acknowledge that the possibility of constitutional change in this area is contributing to the country’s difficulties in securing foreign investment. Incoming FDI fell from a high of 80 billion rand, approximately 6 billion dollars, in 2013 to just 17 billion in 2017. This has left South Africa heavily reliant on volatile foreign portfolio inflows, which have more than doubled over the last five years. More positively, investment in the auto sector is strengthening, but an improvement in relations between the government and the mining sector may be imperilled as the 2019 election approaches. Legislation introduced in July would make it easier for the government to define and break up market monopolies and to prevent foreign takeovers on grounds of national security.
TREND ► OUTLOOK ►
Although outbreaks of violent protests continue across the country, usually triggered by municipal corruption or poor delivery of services, these are localised and do not threaten mainstream economic activity. Action by workers protesting Eskom’s rejection of a 15% wage rise at the beginning of negotiations for a three-year deal briefly caused power outages in June. Industrial unrest remains possible in North West Province, already a volatile area, over planned job reductions in the platinum sector.
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President Ramaphosa removed the director general of the State Security Agency, Arthur Fraser, in April as part of his move to the focus of the intelligence services away from domestic political factionalism. Attacks on two mosques in May and June, one in KwaZulu-Natal and one in the Western Cape, are not being treated as terrorism by the police. The country remains an unlikely target for terrorist attacks, although it has previously been used a base to plan attacks on other countries.
Having made its first cut for five years in March, the central bank has since kept interest rates at 6.5% while emphasising the need to keep inflation well inside the target band of 3-6%. The rand remains under pressure from external factors, including a strong dollar, the weakness of other similar currencies, and the prospect of global trade disruption, as well as internal concerns. Although President Ramaphosa has held back attempts to reorganise the central bank’s structure, the issue may return next year.
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 the liabilities of the country’s state owned enterprises, notably Eskom. At a meeting between Presidents Ramaphosa and Xi in July, China pledged to invest 14.7 billion dollars in South Africa.
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