geopolitical risk ratings firm

South Africa Country Update

18-Month: Pragmatic ANC 60%
Five-Year: Pragmatic ANC 50%

Financial Transfer Direct Investment Export Market
18-Month: Moderate B (B+) B B+
Five-Year: Moderate B- B- B-
( ) Indicates change in rating.    *  Indicates forecast of a new regime.


Real GDP Growth %  
Inflation %
Current Account ($bn)
2005-2009(AVG) 3.7 6.8 -14.75
2010(F) 2.7 5.3 -17.70
2011-2015(F) 3.8 4.8 -18.10

Zuma Buffeted by Competing Demands

South Africa’s role as host of the 2010 soccer World Cup provided a welcome boost to the country’s image, lucrative construction contracts, and a temporary increase in consumer spending. But having shown its ability to rise to the occasion when the whole world is watching, President Jacob Zuma’s African National Congress (ANC) government faces the burden of raised expectations among a population frustrated by the failure to address the problems of widespread crime and corruption, high unemployment, and an education system that does not provide young South Africans with the basic tools needed to rise out of poverty.
It is unlikely that Zuma’s government will accomplish enough to significantly reduce the level of public discontent, not least owing to the widening of a political divide within the tripartite alliance of the ANC, the South African Communist Party (SACP), and the Congress of South African Trade Unions (Cosatu). On one side, leftist elements in the ANC, the SACP, and Cosatu are pressuring Zuma to abandon the free-market policies of his predecessor, Thabo Mbeki, and focus more heavily on strengthening the social safety net and increasing investment in education and health. On the other side, domestic business elements have rallied behind Joseph Malema, the firebrand head of the ANC Youth League, whose mix of populist and nationalist rhetoric is often incompatible with a free-market perspective, but has nevertheless resonated with business elites who have profited from their privileged access to government officials.
The conflict within the governing alliance is as much personal as ideological in nature, and the ambitions of various ANC heavyweights jockeying for position ahead of a 2012 party congress have added to the intensity of the disputes. Malema is spearheading an effort to replace the party’s incumbent general-secretary, Gwede Mantashu (who is also the acting chairperson of the SACP) with Fikile Mbalula, the current deputy commissioner of the national police. The rivalry between the competing factions is likely to heat up with the approach of the September session of the ANC’s National General Council, the party’s highest policy meeting of regional leaderships.
Malema enjoys the support of Minister of Human Settlements Tokyo Sexwale, Defense Minister Lindiwe Nonceba Sisulu, and the ANC’s treasurer, Mathews Phosa – all of whom harbor presidential ambitions – as well as Communications Minister Siphiwe Nyanda, a former army chief and a close ally of Zuma. Other than Mantashu, key figures on the other side of the divide include Zwelinzima Vavi and Higher Education Minister Blade Nzimande, the general-secretaries of Cosatu and the SACP, respectively.
No one with presidential aspirations can risk alienating the powerful Youth League, which explains in part why Malema has been granted the freedom to boost his profile over the past six months with increasingly aggressive and divisive public appearances. In defiance of party directives, Malema has made inflammatory speeches denouncing imperialism and “white” domination, and embarrassed the government by making a trip to Zimbabwe where he extolled the nationalization policies of President Robert Mugabe.
However, Malema crossed a line when he came close to publicly questioning Zuma’s authority. Rare disciplinary procedures were pursued by the ANC, which ordered Malema to issue a public apology to the president. Many within the party called for a tougher penalty, but Zuma opted for an approach that confirmed his authority while leaving open the door for a rapprochement with the Youth League leader, which may be essential to his hopes of a smooth re-election bid in 2014.
More immediately, Zuma must ensure that his allies retain control of key party leadership posts, a task that could be difficult if the ANC makes a poor showing at local elections due to be held in spring 2011. Although the ANC has enjoyed a position of unchallenged dominance at the national level, the opposition has enjoyed a modicum of success in municipal and provincial elections over the years, benefiting from reduced turnout of ANC supporters for local contests.
The government’s lackluster handling of corruption scandals has already alienated its base, and if the internecine strife turns off more voters, the opposition Democratic Alliance (DA) and the Congress of the People (COPE) could make important gains, possibly even winning control of Port Elizabeth, the metropolitan center of the ANC’s historical stronghold in Cape East Province. Blame for any significant electoral setback would inevitably fall on the president, potentially setting the scene for a revolt in the subsequent party leadership elections that undermines Zuma’s hopes of securing his party’s presidential nomination for 2014.
Government Steering a Steady Policy Course…for Now
Zuma was elected with the strong backing of the leftist elements within the tripartite alliance, but he has so far tacked closely to the liberal course set by Mbeki. Trevor Manuel, a former finance minister and the chief architect of the economic strategy pursued by Mbeki’s government, has established the new National Planning Commission, which will be responsible for formulating the Zuma administration’s policy program. The SACP and Cosatu lobbied hard for an important role for Economic Development Minister Ebrahim Patel, resulting in nearly a year-long delay in getting the NPC up and running, but Manuel managed to fend off pressure from the left with support from the president.
Similarly, Finance Minister Pravin Gordhan has confirmed the government’s commitment to maintaining the 3% – 6% inflation target, and the South African Reserve Bank (SARB) has resisted vocal demands for moves to devalue the rand and lower interest rates.
However, the president’s political vulnerability adds to the risk of greater policy uncertainty going forward, as the president lurches between statist and free-market approaches in a bid to appease whichever faction poses the greater immediate threat to his hopes for a second term. Cosatu is already ratcheting up the pressure, demanding wage hikes above the inflation rate and organizing strikes to protest a plan to increase electricity rates by 25% annually over the next three years. A transport strike in May resulted in $890 million in lost revenues from exports of coal, and government employees have threatened to walk out in August in support of their demand for an 8.6% wage increase and a $137 housing subsidy.
From a different direction, Malema and the Youth League have been at the forefront of a campaign to nationalize the mining industry. Early in the year, Malema issued a warning that the Youth League could not support any presidential candidate unwilling to include a pledge to pursue state control of the mining sector in his campaign platform. The Youth League has accused private mine operators of stealing the birthright of South Africans, and has called for a halt to the issuing of any new mining licenses pending the approval of legislation that mandates a minimum 60% government share in all mining businesses, which would be managed by a new state-run mining company.
For its part, the government has denied that it is even considering such a plan. In February, Mineral Resources Minister Susan Shabangu reassured mining industry representatives attending the annual Mining Indaba conference that nationalization will never be part of the Zuma administration’s strategy. The president has similarly downplayed the proposal as the product of an internal debate within the Youth League that has no bearing on decision-making in the Cabinet. The SACP and Cosatu have also rejected nationalization as impractical.
By May, Malema himself began toning down his demands, saying that the Youth League’s proposal for a majority stake for the government would only apply in the case of new mining operations. However, he confirmed that nationalization will be on the table at the ANC congress in 2012. While it remains unlikely that such a proposal will actually be adopted by the party, it is likely that some presidential aspirants might embrace the plan in a bid to secure the backing of the Youth League, and that could be enough to undermine confidence, at least until the shape of the presidential race becomes clearer.
Sizeable Deficits, Slow Recovery
The economy received a significant boost from the World Cup, with tournament-related investment and tourism income expected to boost real GDP growth by as much as one-half of a percentage point in 2010. Business confidence rose to its highest level in nine months in the immediate aftermath of the event and repeat tourism is expected to be high. However, hosting the tournament was not an unmitigated benefit. The government made a total investment of $4.3 billion, more than 10 times the original estimated cost and the largest outlay in the history of the World Cup as a percentage of GDP. Moreover, the economic stimulus from the tournament has not had much of a beneficial effect on employment, and the economy has not revived as strongly as hoped. Such considerations, as well as the large chunk of the profits pocketed by the international football association (FIFA), has sparked a debate within the government and among the broader electorate as to whether that $4.3 billion might not have been better spent elsewhere.
Tax revenue is on track to undershoot the budget target by more than $9 billion this year, but given Zuma’s political troubles, there is little chance that the government will take any steps to trim spending on social services, which Finance Minister Gordhan noted in his February budget speech accounts for more than one-half of total government expenditures. Consequently, the fiscal deficit is forecast to widen to 6.8% of GDP.
At the same time, the current account deficit is projected to expand to nearly 5% of GDP, as strengthening domestic demand boosts imports and the weakness of the economic recovery in key markets dampens growth of exports. With inflows of foreign direct investment (FDI) showing little sign of a healthy revival, the substantial external financing requirement will result in the further increase of the foreign debt burden, which has grown from less than 20% of GDP in 2005 to about 28% of GDP at present.
In June, inflation eased for the sixth straight month to 4.3% (year-on-year), as food price inflation fell to its lowest level since 1995. Concerns that a weaker-than-expected recovery in debt-troubled Europe could hamper South Africa’s own economic revival raised expectation that the SARB might once again cut its benchmark interest rate, which was slashed to a historical low of 6.5% in March. However, expectations that strengthening domestic demand will push the year-end inflation rate above 5% prompted the central bank to hold the repo rate steady at its most recent policy meeting in late July.
The economy has shown some signs of life, growing by 1.4% (year-on-year) in the first quarter of 2010, after recording an annual contraction of 1.8% in 2009. The performance in the second quarter was undoubtedly stronger, given the stimulus generated by the month-long World Cup event, but a very high unemployment rate, which topped 25% at the start of the year, a heavy private-sector debt burden, and unfavorable lending conditions will limit the potential for a sustained strong recovery over the second half of the year. A loose monetary policy and robust government spending will bolster private spending, combining with expansion in the mining and manufacturing sectors to fuel real GDP growth of 2.7% in 2010. Economic weakness in both the US and Europe will limit the potential for the significant further acceleration of growth next year, when the economy is forecast to expand by 3.5%, still significantly below the 5% – 6% rates recorded in years immediately preceding the eruption of the global financial crisis in 2008.

Economic Forecasts for the Three Alternative Regimes

Pragmatic ANC Socialist ANC Divided Government
2010 2.7 5.3 -17.70 2.0 7.8 -21.20 2.3 7.5 -19.80
2011-2015 3.8 4.8 -18.10 2.1 8.0 -24.10 1.5 8.9 -26.00


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