South Africa: Risk Assessment
Country Risk Rating
Business Climate Rating
- Regional economic and political powerhouse
- Rich in natural resources (gold, platinum, coal, chromium)
- Advanced services sector (particularly financial)
- Legislative environment protects investors
- Poverty and inequalities are sources of social risk (crime, strikes and demonstrations)
- High unemployment (over 29%) and shortage of skilled labor
- Aging infrastructure (transport, energy)
- Dependent on volatile flows of foreign capital
Listless growth, despite a rebound
Curbed by drought conditions, power cuts, high unemployment, and fiscal pressures, activity is expected to pick up modestly in 2020. Despite monetary policy easing, which may support consumer credit, the record level of unemployment (almost 30% of the workforce) will continue to weigh on household confidence, limiting the contribution of private consumption. Weak domestic demand is expected to continue to inhibit the manufacturing and mining sectors. The risk of additional power cuts, which would further harm the contribution of these sectors, cannot be ruled out in 2020. Manufacturing and mining will also be exposed to softer external demand, particularly in China. In addition, the review of the country’s eligibility for the United States’ Generalised Preference System, which exempts exports to the US market from certain customs duties, threatens exports, particularly in the automotive sector. Limited domestic demand, which will constrain imports, should nevertheless allow foreign trade to make a positive contribution to growth. Difficulties at the fiscal level and at state-owned companies, which are the drivers of infrastructure investment, will remain obstacles to public investment, hindering construction. Private investment will remain hesitant in the face of recurrent social movements, high operating costs and the polarising issue of land reform, which could allow expropriations without compensation.
Inflation is expected to go up in the wake of rising electricity, food and fuel prices, but weak domestic demand should prevent a sharp increase.
Deteriorating public accounts, fragile external accounts
The budget deficit is expected to widen in FY2020/2021. Listless activity will impact revenue growth, which will remain modest as a result. On the expenditure side, the agreement on wage indexation above inflation will probably prevent the size of the wage bill from being lowered. Additional spending pressures will arise from support to state-owned enterprises, including Eskom, the state utility company, which is in serious financial difficulty. Interest payments will also continue to be felt, absorbing almost 15% of revenues. This is a consequence of the increase in public debt, of which the ratio to GDP has already doubled over the past decade, with this trend expected to continue. The risk of debt distress is mitigated by the composition of debt. It consists mainly of long-term rand-denominated securities from domestic sources, but it is held at almost 40% by foreigners. The debt developments also expose South Africa’s credit rating to a further downgrade by the credit rating agency Moody’s, which would mean loss of investment-grade status, leading to capital outflows.
However, portfolio investment and, to a lesser extent, FDI are essential to finance the current account deficit. In 2020, the deficit is expected to remain virtually unchanged, mainly due to the income deficit, which is maintained by profit repatriations by foreign companies, while also being affected by the increase in interest payments. The balance of transfers will continue to show a deficit, due to payments made to SACU partner countries. The small trade surplus should be safeguarded thanks to the small increase in imports. However, exports will also rise modestly: while they could benefit from a depreciation of the rand, they will be depressed by weak external demand and low mineral export prices. Freight services are expected to continue to generate a small deficit in services. Possible difficulties in financing the current account deficit could put pressure on the rand and foreign exchange reserves, which cover about 5 months of imports.
Increasingly pressing socio-economic challenges
Cyril Ramaphosa became President in 2018 following Jacob Zuma’s resignation and was elected at the ballot box in May 2019, after the African National Congress (ANC) took 57% of the vote. Although this result allowed the party, which has ruled since the end of apartheid (1994), to hold onto its majority, it was the lowest score in 25 years. Voter turnout, at 66%, was likewise at a 25-year low. Priorities include stimulating investment to support growth and create jobs, restructuring Eskom and resolving land reform issues. However, the social climate remains extremely tense and could hinder the development of public policies. For instance, in 2019, the mining sector and state-owned companies were hit by a wave of strikes. Resistance from trade unions and some ANC factions could slow implementation of some reforms. In a tense social environment, where access to employment remains difficult, the security situation is strained, as illustrated by acts of violence against immigrant communities from other parts of Africa at the end of summer 2019. These attacks have created diplomatic tensions with other countries on the continent, particularly Nigeria. The business environment is relatively favorable but appears to be becoming less competitive, as evidenced by the 50-place drop in the Doing Business ranking over the last decade, mainly due to persisting regulatory constraints.