Impact of Political Uncertainty on South African Growth

Impact of Political Uncertainty on South African Growth

Since 1994, the South African economy has gradually transformed with increasing numbers of black professionals and business owners in an economic climate which was once characterised by apartheid era pro-white economic policies. However, transformation has been slow in major income-generating sectors such as mining, farming and the manufacturing industry.

 

The 1913 Land Act set aside 7.5% of the land in South Africa for black people1, therefore one of the post-apartheid transformation agenda objectives is to promote land restitution through the Restitution of Land Rights Act of 1994. However, most of the arable land in South Africa is owned by white commercial farmers; 67.0% of land is White commercial agricultural land while 15.0% is Black communal land2. The ‘land restitution question’ has become a popular subject of debate with many black citizens. Groups such as Black First Land First (BFLF) and the Economic Freedom Fighters (EFF) are demanding immediate land redistribution to benefit the majority black populace. The ruling African National Congress (ANC) party rejected the EFF’s motion, in February 2017, to amend Section 25 of the Constitution of the Republic of South Africa to allow for the expropriation of land without compensation. The absence of government led land redistribution strategies in the near future may therefore lead to widespread demonstrations in support of the BFLF and EFF’s proposals for land restitution.

 

In June 2017, the Mineral Resources Minister, Mosebenzi Zwane announced a new Mining Charter which was recently suspended. The new Mining Charter seeks to further promote Black Economic Empowerment (BEE) by requiring new mining rights holders to provide at least 51% stake to Black people during prospecting and a 30.0% stake during operation. The 30.0% stake that new mining rights holders are required to provide for BEE entities can be distributed across employee shareholder schemes (at least 8.0%), community trusts (at least 8.0%) and BEE entrepreneurs (at least 14.0%)3.

 

Although the Charter promotes BEE it has created uproar and disagreement about the true intentions and possible implications for the development of the South African economy. On the one hand, there is a risk that mining companies may employ corporate strategies such as avoiding higher effective tax rates by declaring dividends in employee share schemes thereby further complicating the governance and implementation of the charter. On the other hand, the charter may have negative implications in terms of investment prospects. In an already deteriorating mining sector, which is facing challenges such as rapidly escalating operating costs, challenging employment relations and increasing rates of retrenchment, the new Mining Charter could lead to further uncertainty4. Anxiety and despair have grown as a result of Anglo Gold’s shutdown of the unprofitable Savuka section of TauTona in Carletonville. This, and other cases of mining operation shut downs and the scale downs of operations, have led to the loss of over 9 000 jobs in the mining sector since the beginning of FY2017/2018. The combined effects of the new Mining Charter and lower levels of investment and productivity in the mining sector have a negative impact on the South African economy.

 

The South African economy plunged into recession for the first time since 2009, after a -0.7% growth in 1Q2017 which followed the -0.3% contraction in 4Q2016. Manufacturing dragged GDP down with a negative growth of -3.7%5. Additional downward pressure was caused by a -1.2% (from 1.6 percent) growth in finance, real estate and business services, -1.6% (from 2.6%) in transport, storage and communication and -4.8% (from 2.4%) in utilities6. Furthermore, unemployment is on the rise; for Q1.2017, the unemployment rate in South Africa rose to 27.7%7 with 48 000 jobs were lost in in this period8. But the economy rebounded with 2.5% growth in 2Q20179.

 

Dependency on government social grants is likely to increase due to increasing unemployment and high levels of inequality. According to StatsSA, over 30.4 million South Africans were living in poverty in FY2014/1510. Social grants have grown by an annual average of 8.5% from ZAR87.5 billion FY2010/11 to ZAR121.3 billion in FY2015/16; and a further 24.5% to ZAR 151 billion (approx. USD 11.0 million) in FY2016/1711. At present, the government of South Africa currently provides “a security net to over 17 million poor South Africans through social grants” 12, which is approximately 31.0% of the country’s population of nearly 56 million.

 

Political Uncertainty
Political uncertainty in South Africa is one of the factors which has led to lower investor confidence following downgrades in South Africa’s credit rating to junk status by Standard and Poor’s (S&P) and Fitch global ratings agencies. Ahead of the ANC’s 54th National Conference in December 2017, the ruling party is experiencing heightened tensions as members seem to be divided in terms of their preferred candidate for the position of ANC President and 2019 Presidential hopeful. Factional battles are a major source of weakness, which can make the ANC more unpopular. Furthermore, the ANC has suffered several setbacks in recent times. Amongst other losses, in the 2016 local government elections, the ANC lost three metropolitan municipalities (Nelson Mandela Bay, Johannesburg and Tshwane) for the first time since the transition to democracy in 1994. In 2017, opposition parties pushed for a secret ballot vote of no confidence against President Jacob Zuma. On 8 August 2017, President Zuma was saved by 198 members of parliament (MPs) who voted against the motion of no confidence. 177 MPs supported the motion while 9 MPs abstained.

 

Since the ANC has 249 parliamentary seats it is evident that about 26 ANC members voted against their party’s president. Following the failed motion, the Democratic Alliance (DA) put forward a motion for the dissolution of parliament. Although unsurprisingly unsuccessful, more moves to remove President Zuma and provoke the ANC can be expected during the build up to the 2019 general elections. The increasing unpopularity of the ANC amongst the electorate cannot be ruled out. Opposition political parties can take advantage of the ANC’s weaknesses to advance their own political goals. As evidenced by the recent Motion of No Confidence and “Zuma Must Go” protests which have been staged in response to President Jacob Zuma’s questionable economic relations with the Gupta family, opposition parties have used allegations of state capture and corruption to garner public support for their own political agenda. The Gupta’s recently started selling their South African based assets however, and so allegations of state capture against President Zuma and the Gupta’s may soon become a weak political weapon. The tripartite alliance between the ANC, the Congress of South African Trade Unions (COSATU) and the South African Communist Party (SACP) has been threatened by allegations of state capture and lack of faith in ANC leadership. The strained tripartite relationships have been demonstrated by the SACP’s threats to exit the alliance and grievances between COSATU and the ANC.

 

As the South African economy continues to be undermined by political uncertainty, increasing rates of unemployment, poverty and rampant inequality, the government needs to implement a set of emergency rescue programs. Between 30 June and 5 July 2017, the ANC held a National Policy Conference which was aimed at building a developmental state which has the technical and political capacity to lead development projects and ensure effective radical economic transformation13. The conference was also aimed at reflecting on the ANC’s strategies and renewing its goals. Employment creation, economic growth and structural change are the major pillars of the ANC’s strategy towards promoting Radical Economic Transformation14. Fast tracked radical transformation may result in a situation reminiscent of Zimbabwe’s fast track land reform program which contributed to the collapse of the Zimbabwean economy two decades after independence from British rule. The Zimbabwean economy has not recovered; the speculated unemployment rate in the country is between 80.0% and 90.0% and the country has not regained its long lost status of “breadbasket of the SADC region”.

 

Conclusion
Socio-economic projects which are aimed at radical economic transformation are required in order to promote more equitable distribution of wealth in South Africa. Such projects can only be effectively implemented if there is political cohesion, transparency and accountability to ensure that benefits do not only fall in the hands of a few people who are well connected or loyal to key political leaders.

 

Episodes of recession and negative outlooks are unavoidable when political shifts and new policy proposals are put forward. The government should therefore forge ahead with economic programs and policies which serve the interests of South African citizens. Investor confidence and ensuring positive economic outlooks should also remain a priority, because investments and global economic relations are important for South Africa’s economic development. The current recession and recent downgrades, accompanied by negative outlooks, should therefore not necessarily be mistaken as predictions of eternal gloom in South Africa and the southern African region in general. South Africa has maintained a number of strengths, these include: “deep domestic financial markets, a well-capitalized banking sector, a well-developed macroeconomic framework and low foreign currency debt” 15.


1 South African History Online
2 Institute for Poverty, Land and Agrarian Studies
3 Department of Mineral Resources
4 South African History Online, ibid.
5-7 Statistics South Africa
8 Statistics South Africa
9 Statistics South Africa
10 Statistics South Africa
11 Statistics South Africa
12 South African Government News Agency
13-14 African National Congress
15 Moody’s Investors Service


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