highlights
- There are problems that even a leader with the freedom to undertake wholesale economic reform would struggle to tackle in a five-year electoral term
- The biggest danger is a failure to tackle massive structural problems associated with governance, regulation and education.
- Ramaphosa is trying to tackle graft, but progress here will be glacial.
South Africa is embarking on an important, potentially brighter, chapter in its history. A fresh administration is in place, after newly re-elected President Cyril Ramaphosa appointed his cabinet, jettisoning some of the old guard in an attempt to draw a line under nearly a decade of scandal-hit rule by predecessor Jacob Zuma.
Ramaphosa has been in power since February last year when Zuma agreed to step down. But until last month’s general election resulted in his victory and gave him a mandate for change, he was broadly unable to make any meaningful reforms.
Now companies and investors are hoping that Ramaphosa, South Africa’s most business-friendly leader since Nelson Mandela, will be able to revive the country’s flagging economy. As he announced his new cabinet, the rand enjoyed a small rally, while the Johnannesburg stock market rose more than 1 per cent.
But anyone hoping for sweeping reforms and a swift improvement in South Africa’s economic future is likely to be disappointed. There are many problems the country faces that even a leader with the freedom to undertake wholesale economic reform would struggle to tackle in a five-year electoral term.
Commodities slump and power shortages
South Africa is a major miner and is still suffering from a slump in commodity prices that began in 2014. This global downturn depressed the price of the metals South Africa digs up, which in turn deflated incomes and kept growth weak. The country’s gold production is in long-term decline as supplies run low.
A wider slowdown in global growth has also hit the economy’s manufacturing sector, because it has sapped demand for the goods that South Africa exports.
But the biggest danger is a failure to tackle massive structural problems associated with governance, regulation and education.
Ramaphosa can only perform his clean-up if he’s not sabotaged by his own party. This is an intricate balancing act.
There are still many state-owned utilities that are heavily subsidised and woefully inefficient. A lack of investment means energy infrastructure is ageing. New plants are needed to keep production up, but that requires cash — and the country is running a budget deficit of 4 per cent of GDP with a debt-to-GDP ratio of 56 per cent.
This might not sound large compared with debt levels of 80 per cent in some European countries, but South Africa pays a much higher interest rate on what it owes.
As a result, electricity blackouts have been commonplace. Eskom, the state-owned electricity provider, is running out of money and creaking under a massive debt pile — which is guaranteed by the government. Years of under-investment and corruption, coupled with rising costs, has meant supply has not kept up with demand. That affects not only households, but energy-dependent industries such as manufacturing and mining.
Education and corruption
Education is the other issue, according to William Jackson, chief emerging markets economist at Capital Economics.
“Despite educational reforms, outcomes are very poor apart from for the elite,” he says. “On many measures of academic results, South Africa is worse than many other African countries despite spending more on education.” That’s partly to do with the unionisation of the sector, he says, which prevents proper evaluation of teachers. Recruiting suitable teachers is another headwind.
As a result, South Africa’s unemployment rate has been hovering at more than 20 per cent for many years. Companies find it hard to recruit workers — not because potential employees do not exist, but because the poor education system means they lack the required skills.
There’s also the not insignificant issue of corruption. Ramaphosa is trying to tackle graft, but progress here will be glacial.
To his credit, he has already put measures in place to improve corporate governance, replacing boards of state-owned companies. He has also talked about splitting up Eskom. But the president has to strike a careful balance, as unions are powerful and vociferously opposed to change of any sort. They lobby against privatisation and have even prevented job cuts, while winning pay rises for the workforce.
Moreover, Ramaphosa’s party, the African National Congress (ANC), is deeply divided between his supporters and those of his predecessor. To get anything done, he will need to compromise and make political trade-offs. Reforms will be difficult to push through without majority support of the ANC.
This situation is reflected in his choice of cabinet. While Ramaphosa has promised to clean up the government and cut down on graft, his decision to keep a number of Zuma supporters in the fold is perhaps his way of keeping his friends close but his enemies closer.
For instance, he reappointed David Mabuza as his deputy, a man who has been implicated in a string of scandals — claims he has always denied.
“Mabuza may be less of a threat to Ramaphosa as deputy president than he would have been had he ended up angry or frustrated in a full-time ANC position,” Susan Booysen at the Johannesburg-based Mapungubwe Institute for Strategic Reflection told Bloomberg News.
“Ramaphosa can only perform his clean-up if he’s not sabotaged by his own party. This is an intricate balancing act.”
Weak growth
South Africa’s growth forecasts do not make for positive reading. Last year’s 0.8 per cent rise in GDP was much lower than expected. This year, the central bank expects growth to reach just 1 per cent, having already cut its forecast twice from 1.7 per cent in January and 1.3 per cent in April. The bank, alongside many analysts, believes the economy probably contracted by 2 per cent in the first quarter of this year — a terrible outcome if it transpires.
“Weak business confidence, possible electricity-supply constraints and high debt levels in certain state-owned enterprises will continue to limit investment prospects,” said the governor of the central bank, Lesetja Kganyago, in March.
Unlike mature, developed markets with stable or falling populations, you would expect a developing economy like South Africa and its population of 57m people to be expanding at a much faster pace of between 3 per cent and 4 per cent. However, it has not managed growth of more than 2 per cent a year since 2013.
“To expect a Ramaphosa rally given these circumstances is not being realistic,” says Jackson of Capital Economics. “At the start of 2018 when he became president there was a big rise in business confidence measures, but the economy fell into recession, so the gap between sentiment and what is actually happening on the ground is enormous.
“Even if sentiment improves now with the new cabinet in place, I would be wary to think that would mean a dramatic improvement in economic prospects. Ramaphosa’s hands are quite tied as the economy has had a period of weak growth and the budget deficit is large.”
Even if the improbable happens and Ramaphosa can make decent progress on any of the many challenges facing the country, it will take a generation for the benefits to follow through.
With no quick fix, potential investors will require considerable patience.
— The Telegraph Group Limited, London 2019
Julia Bradshaw is a Business News Editor at The Telegraph.
