South Africa: Risk Assessment
Country Risk Rating
Business Climate Rating
- Regional economic and political power with a large, young population
- Rich in natural resources (gold, platinum, coal, chromium, rare metals, oil, etc.)
- Developed services (71% of GDP) and financial market
- Floating exchange rate regime, central bank independence
- Healthy banking system
- Public debt mostly in rand and long maturity (12 years on average)
- External credit situation (8% of GDP thanks to assets exceeding liabilities to foreign countries)
- Weak growth
- Poverty, growing inequalities, high unemployment (especially among young people), sources of social risk (crime, strikes and demonstrations)
- Skill shortages, labor market rigidity
- Low efficiency of public spending, corruption
- Scarcity of foreign direct investment, hindering the development of the extractive sector
- Fragility of public accounts and public enterprises (guaranteed Eskom debt = 9% of GDP)
- Dependence on volatile foreign capital flows, erosion of foreign exchange reserves (5 to 6 months’ worth of imports)
- Aging and insufficient infrastructure (transport, energy) with frequent power cuts
- Deindustrialization (manufacturing industry=12% of GDP), large share of minerals in exports (60%)
Timid recovery from a deep recession
While growth was already very weak, the severe lockdown to combat the COVID-19 pandemic, coupled with the fall in external demand, caused a deep recession in 2020. With the lifting of restrictions and the external upturn, activity is expected to show moderate growth in 2021, which will owe much to the base effect. Household consumption (60% of GDP), heavily affected by lockdown, should recover moderately. Even if unemployment falls from its peak (43% in Q3 2020), it will remain high. Cut back by the fall in employment, incomes have also been affected by the fall in wages in the private sector, which is largely informal. Public sector wages could see a sharp deceleration in the context of fiscal consolidation. Furthermore, households will be faced with an increase in electricity prices of more than 9%, as well as weak consumer credit due to the prudence of banks. Investment (18% of GDP) will recover only slightly. The public sector, which is in a poor financial position, is counting on the involvement of the private sector for the implementation of the infrastructure (transport, energy, housing) and reindustrialization components of the Economic Reconstruction and Recovery Plan announced in October 2020. Attracting foreign investment will remain difficult because of the uncertain electricity supply, numerous strikes, corruption and crime. Exports of goods and services (30% of GDP) will continue to benefit from the good performance of mineral prices, for which the essential Chinese demand will remain well oriented. Other products, notably automobiles, should benefit from an intensification of the recovery in Africa, as well as in North America and Western Europe. Conversely, tourism (9% of GDP) will struggle to recover, which will continue to weigh on the accommodation and transport sectors.
Public accounts remain the Achilles' heel
The public accounts deteriorated significantly during the 2020-2021 fiscal year. The deficit may have exceeded 15% of GDP and the debt at the end of the fiscal year may have amounted to 83% of GDP (albeit reduced). This is due mainly to the large revenue shortfall caused by the recession, but also to capital injections into public enterprises. Additional expenditure related to COVID-19 (10% of GDP), of which only a third will have affected the budget, also contributed, although this was largely offset by cuts in other expenditure. The gross financing requirement, including deficit and debt refinancing, is expected to have reached 25% of GDP compared to 15% a year earlier. This has prompted the government to seek multilateral financing (notably the IMF) for around 10% of this need. On the bright side, 88% of the public debt is denominated in rand, 70% of which is held by residents (mainly banks). It is easily found on the large domestic market thanks to comfortable yields (4.4% at 2 years, 9% at 10 years) while the key rate of the central bank was only 3.5% at the end of November 2020. This leaves 38% for non-residents, including foreign currency-denominated debt, even after their divestments in the wake of the global market turbulence in spring 2020, which temporarily led to a depreciation of the rand and a rise in yields. Although debt repayment is expected to be low in 2021, the market could be shaken again, especially since the major rating agencies rate sovereign risk as speculative. The fiscal year 2021-2022 will bring only limited improvement in public accounts and will see further increases in debt. Their consolidation will require major efforts, given that wages represent one third of public spending, transfers to public enterprises another third, and interest 13%.
The current account deficit has almost disappeared as of 2020. The trade surplus has increased due to the contraction in imports linked to reduced domestic demand, while the contraction in exports has been smaller due to their recovery in the second half of the year. Moreover, the terms of trade improved with the decrease in the price of hydrocarbons and the increase in the price of precious metals. The balance of services, usually balanced, deteriorated with the fall in tourism. The income deficit persisted with transfers to other members of the Southern African Customs Union (SACU), remittances from migrant workers, and repatriations by foreign investors not offset by the income from South African investments abroad. A small current account deficit will reappear in 2021 with the resumption of imports. FDI will remain scarce, and its financing will therefore rely on portfolio investment. The refinancing of external debt (53% of GDP at the end of 2019, half in rand) will be essentially linked in 2020-2021 to its private share (more than half).
Pressing social and economic challenges
The crisis has exacerbated unemployment, poverty, divisions, corruption, and generated a seventh year of declining per capita income. The ANC, in power since the end of apartheid, with little competition from the opposition and 230 of the 400 seats in the Assembly since the 2019 elections, is more divided than ever, with prominent members accused of corruption. Its left-wing faction wants land redistribution with limited compensation, increased Black Economic Empowerment, opposes wage moderation in the civil service and is impeding the reform of the electricity market. President Ramaphosa hopes that the ANC's National General Council scheduled for spring 2021, ahead of the municipal elections, will help shed some light and convince public opinion and the market that reforms are possible.