Country risk: One step forward, two back for stuttering South Africa

University of Cape Town. Photo: Reuters

South Africa’s fall from grace is legendary among the leading emerging markets.

Held back by its political and economic problems – including sky-high unemployment, social unrest and an indebted electricity sector – analysts have progressively downgraded its investor prospects in Euromoney’s country risk survey. The country currently sits between Montenegro and Senegal in 96th place.

The negativity has continued this year, with South Africa’s total risk score down by just over 1.1 points on a year-to-date basis. That is almost 5.7 in total over five years and 11.7 on a 10-year long-term trend basis – more than India, Mexico, Nigeria and Turkey.

Positively, the worst of the pandemic seems to be over, with economic recovery taking root.

As part of its medium-term budget policy statement this month, the Treasury indicated that GDP would grow in real terms by 5.1% this year, which is in line with the IMF’s prediction of 5%.

The revised GDP data and firmer-than-expected economic growth have helped to improve the fiscal ratios, notes ECR survey contributor Isaac Matshego, senior economist at Nedbank Group, based in Sandton.

“The government is implementing policies that will help expand power generation,” he says. “The rail utility is forging ahead with a programme to license private rail operators to utilize the national rail network.

“These reforms are encouraging, but more still needs to be done to stimulate private-sector investment. An acceleration of reforms and faster economic growth will be necessary to avoid lower [country risk] scores beyond the immediate future.”

The context is a steep dive in 2020 when GDP crashed by 6.4%, the budget deficit deteriorated to 9.9% of GDP in 2020/21 (to end-March), from 6.1% in 2019/20, and gross government debt soared to 70.7% of GDP from 57.4%.

Moreover, in 2022, GDP growth is expected to settle down to around the 2% mark, which is far too low to make any meaningful inroads into the nation’s unemployment and poverty crisis.

“Power shortages remain a critical risk to the economic upturn,” warns Matshego.

“Persistent outages could disrupt the strong momentum in mining and, in that way, lead to the economic recovery in South Africa losing momentum at a time when the other developing economies continue to benefit from favourable global demand.”

The unemployment rate hit a record high of 34.4% in the second quarter, leaving 7.826 million South African adults without work, with youth unemployment – already a problem – increasing alarmingly.

Not only does this trend deprive the Treasury of much-needed revenue, but it also adds to the country’s social problems, acting as a potential spark for the types of social unrest the country has witnessed previously, including the violence and looting that accompanied the jailing of the former disgraced president Jacob Zuma.

All of this is creating a political backlash for the ruling African National Congress (ANC), which suffered the ignominy of receiving less than 50% of the vote for the first time in the country’s modern democratic era at the recent municipal elections, which were marred by a low turnout.

Many voters have become disenfranchised by the lack of basic water and electricity supplies, and the litany of corruption, and while the opposition is divided, several parties have benefited.

Ramaphosa is also polling ahead of the party in popularity. This line of thinking suggests that the ANC can simply not afford to get rid of the president 

 - Bureau for Economic Research

They include Julius Malema’s left-wing Economic Freedom Fighters, the KwaZulu-Natal-based Inkatha Freedom Party led by Velenkosini Hlabisa, Pieter Groenewald’s right-wing Freedom Front Plus, and ActionSA, a liberal party that was formed during the pandemic by the former mayor of Johannesburg, Herman Mashaba.

To maintain the ruling party’s discipline and control, and improve service delivery, president Cyril Ramaphosa reshuffled his cabinet before the elections for the first time since taking office three years ago.

It was partly necessary to replace two members who had died in office, and a third, the minister of health, Zweli Mkhize – who had already stepped away facing allegations of corruption and was replaced by his deputy, Joe Phaahla.

Finance minister Tito Mboweni also requested to stand down and was succeeded by Enoch Godongwana, whose first budget received a cautious welcome by sticking to the path of fiscal consolidation, aided by a slightly improved outlook virtue of a tax windfall and departmental budgeting restraint.

One of the big questions after the November 1 elections is how the ANC will respond to electoral losses and what that implies for the general election in 2024, according to another Euromoney survey contributor Johann Kirsten and his colleagues at the Bureau for Economic Research in Stellenbosch.

The higher voter turnout in general elections tends to favour the ANC, they say.

“However, it is worth bearing in mind that even if the ANC stages a similar (3.6 percentage point) recovery as it did between the 2016 local poll and the 2019 general election, it will still fall just shy of an outright national majority in 2024,” they add.

There are then two main responses. “One is that the reformers in the party will double down behind Ramaphosa’s agenda, as a renewal of the party is the only way to regain the trust of voters and prevent an equally poor electoral performance in 2024,” they say.

“Ramaphosa is also polling ahead of the party in popularity. This line of thinking suggests that the ANCcan simply not afford to get rid of the president and that he would be a shoo-in to be re-elected for a second term as ANC president at the party’s elective conference in December 2022.”

However, some have argued that real renewal will only be possible if the ANC splits. Furthermore, the University of the Witwatersrand professor William Gumede has made the point that it is a real challenge to fully reform while a party is in power, as the potential for patronage and corruption is too high whilst political parties hold the strings of power.

Taken to its logical conclusion, if the party does split, South Africa could eventually end-up with a grand coalition between the reformist part of the ANC and the centrist part of the Democratic Alliance (DA), argue Kirsten and his colleagues.

An alternative view is that the stark ANC electoral losses will embolden Ramaphosa’s foes in the ANC and that they could call for a vote of no confidence in the president at either the 2022 ANC policy conference or the elective conference.

ANC infighting is likely to continue, which again detracts from good governance, reform and policy implementation. This is all against the backdrop where structural economic reforms are crucial to improve the country’s medium-term real GDP growth performance.

The general political climate will not be conducive to business and consumer confidence, fixed investment and GDP growth, say Kirsten and his colleagues, and like Matshego and other experts, on that basis they are not prepared to upgrade South Africa’s risks.