South Africa: Risk Assessment
Country Risk Rating
Business Climate Rating
- Regional/continental economic and political power
- Rich in natural resources (gold, platinum, carbon, chromium…)
- Advanced services sector (especially financial)
- Legislative environment provides protection for investors
- Poverty and inequality are sources of social risk (crime, strikes, and demonstrations)
- High unemployment (27.7%, 54.3% for those aged 15-24) and shortage of skilled labor
- Infrastructure shortcomings (transport, energy)
- Dependent on volatile flows of foreign capital
In 2018, the economic recovery, brought about by a bumper harvest following the drought in 2016 and a rebound in the mining sector, underpinned by more favorable commodity prices, should continue at a moderate pace. While these two sectors are expected to continue to sustain exports thanks to more positive world economic conditions, their respective contributions to growth will moderate. In particular, mining could suffer from the implementation of a controversial new mining charter. As a result, investments in the sector will be slow, at least until the judicial review at the end of February, which will decide on whether it can be implemented. More generally, with business confidence still low, operational costs high and further downgrades on the sovereign ratings at the end of 2017, private investment is expected to remain weak, continuing to put pressure on the secondary sector. Nonetheless, a modest recovery is expected after the conference to elect a new ANC leader in December 2017 provided greater political certainty. Public investment will be bitten by a degraded budget profile. Unemployment and high levels of inequality will continue to impact on household confidence, but the moderation in inflation and higher real wages should sustain private consumption. By supporting trade, consumption will help bring about a cautious rebound in services, which saw anemic growth in 2017. With inflation back within the central bank target range (between 3% and 6%), the bank will benefit from greater flexibility and thus have more scope to ease its monetary policy in 2018 so as to support activity.
Debt Trajectory Threatened by a Degraded Budget Profile
Caught up in an economic slowdown and low rates of tax collection, the budget outlook is worsening. The growing burden of debt interest payments, which use up almost 14% of State revenues, on spending is notably the reason for this deterioration. In 2017/18, the financial rescue of state-owned enterprises (South African Airways and the South African Post Office) resulted in a huge overspend. The 2018/19 budget measures, which have still not been fully signed off, are expected to include a combination of budget cuts and higher taxes. Nevertheless, any consolidation before the 2019 elections will be cautious. In connection with this fiscal deficit, the debt burden is likely to continue to climb in the next few years, thus increasing sovereign risk. On top of this, country’s local currency debt was hit by a rating downgrade to “speculative” status by rating agency S&P in late 2017. As a result, the cost of credit is expected to continue to climb.
The current account deficit is expected to worsen slightly in 2018, in connection with the surplus on the balance of goods, which is expected to reduce. This is because even though the global economic picture should support a rise in exports, the economic recovery and higher oil prices will lead to faster import growth. The slight services deficit is not expected to wipe out the trade surplus. The current account will, however, continue to show a deficit, as it will be hit by the impact of significant levels of profit repatriation by foreign companies holding South African assets on the income balance. To a lesser extent, outgoing transfers in the context of the South African Customs Union (SACU) will also be a strain on the accounts. While capital flows could be hit by successive downgrades to the country’s credit rating, the external position is unlikely to be at risk in the short term. However, fluctuations in the influx of capital mean the rand will still be volatile.
The credit rating downgrades could put pressure on the banking sector, given the banks’ significant sovereign exposure. However, the sector, which is still well capitalized, remains sound.
Cyril Ramaphosa will Need to Rebuild Confidence
Returned to power in 2014 after the ANC’s (African National Congress) victory in the general elections, President Jacob Zuma has suffered a loss of authority within his party and declining popularity with the public. Perceptions that corruption is growing under a president, who is also the subject of allegations of misappropriation of funds and collusion with the business community, are fuelling a loss of confidence among foreign investors. Mr Zuma, who is due to step down in 2019, will leave behind a record marked by slower economic activity, rising levels of unemployment, poverty, and inequalities. These sources of political and social instability remain, even after the ANC conference in December 2017 appointed Cyril Ramaphosa to succeed Jacob Zuma as leader of the party. In addition, this does not resolve all of the ANC’s internal turmoil. Externally, if the current vice-President actually succeeds Jacob Zuma as President of the “rainbow nation” in 2019, rebuilding investor confidence will also require the implementation of structural reforms able to restore governance credibility.
The country, ahead of its peers in Sub-Saharan Africa regarding the business climate ten years ago, continues to fall in the Doing Business ratings, dropping from 32nd in 2008 to 86th in the 2018 Index, especially because of the lack of reform to tackle red tape.