South Africa’s new political transition will unfold in a year of economic turmoil. The ruling ANC is highly likely to return in office, while world recession and falling commodity prices will hamper overall economic activity and business confidence. Radical policy shifts is not expected, but investors will exercise caution. Assuming a gradual recovery in external economic conditions, and on-going development of the infrastructure in the coming year, real GDP growth should average around 3.6 % annually in 2010-13.
Political transition
With South Africa’s next general election coming up—scheduled to take place on April 22nd—and the world recession pressing down, the country is facing a challenging period. A victory for the ruling African National Congress (ANC) is the most likely outcome, but the recently formed Congress of the People (COPE) has secured an impressive range of defections to date and is poised to do well in some of the counties like the Western Cape.
Cope’s most promising constituency appears to be the black middle/upper class that expanded under the previous president, Thabo Mbeki, but now feels threatened by the left. The best that COPE can realistically hope for is a 20% share of the vote, thus replacing the Democratic Alliance as the official opposition—the two parties will be in competition in some areas—and showing that it was likely to be a serious contender in the medium-term. However, if COPE wins no more than 5% of the vote, it would be largely irrelevant. South Africa’s president-in-waiting, Jacob Zuma, may face a third corruption trial in August, following the election, but this is unlikely to prevent him from becoming president if the ANC wins.
Government policy
The global recession and heightened risk aversion will compound the challenges facing the new policymakers, as the economy is heading for a substantial slowdown amid much weaker commodity prices, weaker external demand and tighter financing conditions. Plans to push ahead with major investment in infrastructure, and the expansion of social services, in an attempt to lay the foundation for future growth, will continue, but as in many other countries, there will inevitably be a rethink in some areas. Important changes will be made in an effort to address problems of crime, improving education, speeding up land reform and pushing ahead with broad-based black economic empowerment. The government is currently devising a short-term strategy to counter the impact of the slump but there are unlikely to be any significant corporate bail-outs. Saving jobs will be a top priority, and business is committed to minimising retrenchment where possible, and working with the government on retraining in other cases.
Foreign investment
South Africa’s relatively open policy for investors will not change, and the country will remain one of the main destinations for non-oil FDI in Sub-Saharan Africa. Significant deals in mining, banking, telecommunications, tourism and industry have been concluded in recent years, and, although FDI tends to be discontinuous, inflows reached a high US$5.7bn in 2007, and an estimated US$6.1bn in 2008. Tight credit conditions and the global economic slowdown will have an adverse impact on FDI inflows in 2009-10, before gradually picking up thereafter. The investment environment will, however, remain marked by several challenges, including lack of skills and electricity shortages, high crime levels, the political power of the trade unions and the dominant role of parastatals in infrastructure, which limits opportunities for foreign investors. The government will retain major parastatals in public ownership and will typically opt for restructuring, not privatisation.
Future outlook
Leading indicators suggest that the economy has deteriorated dramatically in recent months, and the government’s fiscal stimulus package will have a limited effect. The economy is forecast to contract in 2009 by 0.8, from a growth of 3.1 in 2008 and average annual growth of 5% in 2003-07. Household consumption growth will contract as unemployment increases, inflation (although falling) erodes real disposable incomes and household borrowing decelerates despite interest-rate cuts. Interest rates are forecast to fall (after a string of rises in 2006-08) in 2009, but this will not have an immediate impact, as many consumers (and some businesses) will remain debt-stressed. The authorities still have a lot of room for manoeuvre on interest rates, even after cutting the benchmark rate to 10.5% in February, but will struggle to counter the impact of severe global weakness.
The struggling sectors—manufacturing, retail and mining—will remain in the doldrums and shed workers (thereby exacerbating demand compaction), although the serious power shortages that took place in the first quarter of 2008 will not be repeated in 2009. Economic downturn will provide some breathing space. A number of large users, including mines and metal smelters, will scale back operations. The performance of key financial sector will clearly have a major impact on overall economic activity. A sharp deterioration in consumer and business confidence means that there is a high risk that the South African economy may enter a deeper than forecast recession. Growth is forecast to recover in 2010—helped by the hosting of the World Cup in June/July, which will give a major boost to tourism and services—before growth returns to close to potential in 2011-13 as the global economy recovers.
The economy in the long-term will benefit from massive public investment in infrastructure (especially power and transport), the progressive lifting of exchange controls on the capital account, the steady reduction in the corporate tax burden, and trade liberalisation. Key obstacles will include high crime levels, skills shortages and other labour market inflexibilities, and uncertainty about land reform. Compliance with black economic empowerment codes will also prove challenging.