FCIB, export credit, global credit reports, collections reports, country risk reports, international credit risk reports, global credit
My Account

The outcome of the local elections earlier this month brought the country closer toward becoming a real democracy, but it did nothing for the troubled economy. On that score, the short-term outlook remains rather bleak and there is still a risk that South African debt may be downgraded to junk status.

The elections on August 3rd, against the backdrop of unfriendly winter weather, were just municipal polls to select representatives of wards, towns and cities. But they turned into a referendum on President Jacob Zuma, in particular, and on the long-ruling African National Congress, in general, and both got an unmistakable thumbs-down from the voters. The ANC suffered its worst defeat since it swept to power in 1994. It managed to retain fairly solid support among rural voters, but lost heavily in the cities, where it is being discredited for having been unable to create economic growth and jobs and provide vital services such as reliable utilities and decent schools for the Black majority.

The main opposition, pro-business Democratic Alliance, long deemed to be a party for wealthy Whites, has been gaining support among Black voters under the leadership of Mmusi Maimane, its first Black leader. It won just over 27% of this month’s vote and cost the ANC its majority in the manufacturing town of Port Elizabeth as well as in Johannesburg, the economic hub, and Pretoria, the capital. Other parties also gained at the ANC’s expense, such as The Economic Freedom Fighters (a radical break-away led by the young firebrand Julius Malema), making these the most competitive polls since the end of apartheid.

All this is good news for democracy in South Africa because it points to the end of an era in which one party controlled all. Henceforth, coalition arrangements may have to become more & more of a consideration. But it is bad news for Pres. Zuma, who has been dogged by corruption allegations and scandals for nearly his entire time in office. The President had only recently survived an impeachment vote in parliament after the country’s highest court had ruled he had failed to uphold the constitution and had ordered him to repay public funds used to upgrade Nkandla, his private residence. He had pulled out all the stops prior to this month’s elections, making the ANC pepper a cool 1 billion rand (USD 70 million) into his campaign.

True, the poll was only a local one and the ANC’s national majority was not at stake. Also true, despite the newly gained strength of the opposition parties they will find it difficult to form any sort of alliance because the ideological differences are so great. The DA believes in furthering business and is free-market oriented. The EFF has been campaigning on a platform of redistribution and expropriation of White land under a beret-wearing leader who models himself after Venezuela’ late Hugo Chavez. Still, general elections are due in 2019 and in the interim Mr. Zuma may well face mounting pressure to step down prior to the ANC’s leadership conference next year. There have been persistent rumors to the effect that his ex-wife, Nkosazana Dlamini Zuma, currently head of the African Union, will come back to South Africa in time to be elected ANC leader.

Much of what happens on the political stage will continue to have repercussions in the economic arena. In one of the best definitions I have read, in an article by David Pilling in the Financial Times of London, when the ANC took over from the White rulers it inherited what was in essence a small first-world economy surrounded by a large third-world one. This meant mass unemployment for low- or unskilled Blacks, which has persisted to this day. One of three South Africans is without reliable work and among young Black people half have no jobs at all. That makes many reliant on government grants, which are difficult to finance when economic growth is non-existent.

Right now this is the case. In part, external factors are to blame, especially a fall in demand and prices for many commodities that has slowed investment and hurt exports. To quite an extent, domestic factors were at work, too, including gross administrative and political missteps such as when Pres. Zuma last December shocked South Africans and outside interests with his decision to replace the respected and trusted Finance Minister Nhlanhla Nene with a little known backbencher (David van Rooyen). By doing this, he put at risk the belief, widespread in South Africa and abroad, that the Treasury (along with the Reserve Bank) is an independent institution immune from the political meddling besetting other state bodies. The ruckus he caused was so great that only four days later (after billions of dollars had been lost by the bond and equity markets) he had to replace van Rooyen with the highly regarded former Finance Minister Pravin Gordhan.

Obviously, such things help depress investor and business confidence, But the 1.2% contraction of real GDP in this year’s first quarter had much to do with declining output in the struggling mining sector and in agriculture (hit by one of the worst droughts in years), and on this front there is no real near-term upturn to be expected either. This leaves little hope for a material improvement in the nation’s rampant poverty and unemployment, which even by the (understated) official measurement comes to 26.6% (as of mid-year). The IMF now predicts a minimal GDP advance of just 0.1% for 2016 as a whole. In my view, the end-result will be below zero.

The Reserve Bank has raised interest rates by 100 basis points since last November. It remains in a tightening mode because its mandate is to keep inflation in check, not to stimulate economic activity. The target range for monetary erosion is 3%-6%, and in June prices were up 6.3% on the year. Fiscal affairs are also not in a position to allow for much stimulation from the public till. In fact, in February Minister Gordhan announced a number of tax increases to prevent the nation’s debt rating from being lowered to junk status. Under Zuma (elected President in 2009) the national debt has persistently crept upwards to reach 50.1% of GDP at the outset of this year. This may still seem low compared with the ratios sported by some highly industrialized nations, but with its wobbly credit rating South Africa already has to pay several times the interest they do.

Unable to grow its way out of this hole, the country has to keep a tight rein on the budget deficit. Mr. Gordhan has said he plans to achieve much of this by getting tough on wasteful state companies and government departments. But, in essence, holding down spending means trying to keep a lid on rising public wages (a staggering 40% of the household plan). On the other side of the ledgers, revenue depends on a tax base of only about 6 million, while some 16 million households in a nation of 55 million people receive stipends from the government.

This leaves little room for maneuver and the international rating agencies rightly conflate the problems of non-existent growth, rising debt levels, a sizeable fiscal deficit, a current-account BoP shortfall that needs to be financed with capital from abroad, and structural as well as political problems. Foreign portfolio flows into the country have been erratic and equity funds suffered at times rather substantial outflows. This makes it essential for South Africa, one of the world’s most traded emerging markets, to maintain international confidence. In June, Standard & Poor’s and Fitch both held their South African bond rating just above sub-investment (junk) grade. But all the rating agencies are now keeping a cautious eye peeled on developments, and with the odds weighing against an early improvement a decision to downgrade South Africa is still entirely possible down the road.