South Africa: Risk Assessment
Country Rating1
Rating: A3
Business Climate Rating1
Rating: A3
Risk Assessment2
Continued moderate growth
After contracting in 2009, the economy recovered moderately in 2010 with household demand offsetting investment sluggishness and a negative foreign-trade contribution. In 2011, the economy is expected to accelerate (+3.5%). Household consumption will sustain its moderate growth buoyed by the higher incomes resulting from recent wage increases. But its future growth will remain constrained by the extent of household debt (77% of their disposable income), a gloomy job picture, and the increase in the cost of electricity and other public services. Investment by private companies, whose financial situation is generally solid, is expected to resume. But the recovery will likely be timid, however, due to the extent of unused production capacity, the uncertainties surrounding both the future trend in domestic demand and in the mine exploitation regime where the authorities have tended to be more interventionist than in the past.
Tightening fiscal policy
Public-sector investment is expected to be less dynamic. The launch of some large transport and energy projects could be delayed even though the lack of capacity in those areas tends to limit growth potential. Conversely, health and education-related spending is expected to continue to grow. And provision has also been made for further increases in civil service wages, which absorb 47% of fiscal revenues. In the end, however, higher fiscal revenues generated by the growth of corporate profits, the increase in customs revenues, and the measures taken to combat tax evasion are expected to enable a reduction in the fiscal deficit.
Inflation under control thanks to the firmness of the rand
Inflation continued to ease in 2010 with the decline in prices for imported products. And it is expected to accelerate slightly in 2011 in phase with the increases in wages and electricity prices, thus remaining within the 3% to 6% target. The increasing cost of imported products is expected to be limited as a result of the stabilisation of world energy prices and the support given to the rand by international financial interests seeking higher returns on their investments.
A current account deficit despite excellent raw-material sales performance
Although the strong rand will continue to undermine manufactured product exports (vehicles, textiles), shipments of minerals and metals will likely further benefit from the strong demand from China and continuing high prices. Despite the growth of imports of machinery, vehicles, and consumer products, foreign trade is expected to be in balance. The current account deficit could nonetheless widen slightly. After the football World Cup, the tourism balance of trade showed its habitual deficit. With the crisis over, repatriation of dividends by foreign investors has been increasing. The same applies to customs-duty clearing payments on behalf of neighbouring SACU member countries. The current account deficit is expected to be covered as in the past by portfolio investments, which are likely to provoke episodes of volatility in the rand, due to their inherent volatility.
Despite laborious progress on social issues, the ANC still enjoys wide public support.
The election in April 2009 of Jacob Zuma, the ANC candidate supported by the Communist Party and the unions, spawned great hopes among the population. But the Zuma government's room for manoeuvre is limited. While maintaining monetary and fiscal discipline, it has not only to accommodate both the unions and business circles but also to muzzle dissension within the ANC itself. Progress on security and public health issues has been laborious at best, which has stoked public unrest. It is true that the policy of positive discrimination, notably implemented in the civil service and state-controlled companies, has enabled the emergence of a black middle class, the so-called "blacks diamonds". But the Black Economic Empowerment policy has also sparked some resentment among a fraction of the population that harbours the feeling that BEE policy only serves to enrich elite circles close to the ANC. Despite these disappointments, the ANC continues to derive great legitimacy from its status as the "liberation party". The main opposition party, the Democratic Alliance, trails far behind. It has only been successful in taking the leadership in the province of Western Cape thanks to the composition of the population there.
Strengths
- 33% of sub-Saharan African GDP
- Extensive natural resources (coal, platinum, diamonds, coal, and so on)
- Diversified industry, efficient tertiary sector (banks, telecommunications)
- Public-sector finances and indebtedness under control
- Business environment among the most efficient in emerging countries
- Economic and political heavyweight on the continent
- Good foreign debt profile: essentially medium-long term and rand-denominated
Weaknesses
- Severe inequality, high unemployment and shortage of skilled manpower
- Human capital deficit (26% unemployment and 11% AIDS prevalence rates, consequences of the apartheid education policy), the main obstacle to economic development
- Dependence on foreign capital inflows which are volatile in nature
- Outlying geographic location
- Sensitivity to raw material prices
- Sensitivity to economic conditions in Europe and United States and to Asian competition
- Deficient transport and energy infrastructure
- 11% AIDS prevalence rate