South Africa is down, but not out yet
Share this article:
THE RECENT civil unrest, violence and looting caused irreparable harm to South Africa and its economy.
Only time will tell who the dark forces behind the mayhem are, but it continues to create uncertainty.
It seems to be aimed at toppling President Ramaphosa, the current economic system and judiciary.
In addition, South Africa’s military involvement in the rest of Africa and, despite being warned, the country’s intention to act against the growing insurgency by jihadists linked to ISIS in Mozambique irked the ire of ISIS and its operatives.
Furthermore, the complacency of the South African government in regard to the country’s security as a result of the dearth of funds and factionalism in government make South Africa a soft target for instability and terrorism.
Political stability and absence of violence/terrorism is one of the broad dimensions of governance in the Worldwide Governance Indicators, a research dataset originally initiated by Daniel Kaufmann (Natural Resource Governance Institute and Brookings) and Aart Kraay (World Bank, Development Economics) in 1999.
Political stability and absence of violence/terrorism measures perceptions of the likelihood of political instability and/or politically-motivated violence, including terrorism for over 200 countries and territories. Countries are ranked on a percentile basis, where zero represents the least stable and 100 points the most stable.
South Africa’s percentile rank among other countries in regard to political stability and absence of violence/terrorism (“political stability”) was 40 out of 100 in 2019. Although the data for 2020 will be published in September, the lockdowns in South Africa to curb the spread of the coronavirus in 2020 could see a relatively unchanged percentile rank from 2019.
In comparison, on a population-weighted basis, the North and
Central Africa regions’ percentile rank in 2019 was 14, West Africa’s 15 and East Africa’s 21. Southern Africa, excluding South Africa’ percentile rank, was 31.
Although the risk as measured by the percentile rank of the African continent excluding South Africa, is high, the unemployment rate is very low compared to South Africa. In 2019, North Africa’s population-weighted unemployment rate was 12 percent, Central Africa’s 8 percent and West and East Africa’s 7 and 3 percent respectively. The unemployment rate in Southern Africa excluding South Africa percentile rank was 8 percent.
Historically, South Africa’s unemployment rate was high with an average of about 26 percent since the turn of the century.
The abysmal growth in fixed investment as measured by gross fixed capital formation of 0.4 percent per year from 2011 to end-2019 due to capital starvation of especially Eskom saw the unemployment rate jump to 29 percent in 2019 from about 24 percent over the same period. The unemployment rate rose to about 33 percent in the first quarter of this year, mainly as a result of the coronavirus.
High unemployment and poor living conditions make people very gullible by promises of a better future and some are easily incited to conduct criminal activity such as looting and torching of businesses and government properties.
South Africa’s percentile rank among other countries in regard to political stability has been in a downtrend, especially since 2011, and only improved and stabilised after President Cyril Ramaphosa’s election as leader of the ANC and president of the Republic of South Africa. What happened over the past few weeks has most definitely slashed perceptions of political stability in South Africa.
I will not be surprised if the country’s political stability rank fell to and even below 2011’s levels. The South African government appears to lack the resources and approach to deal with the security issues.
Perceptions of political stability and business confidence move hand in hand. The mayhem over the past few weeks and the continued uncertainty of possible attacks by the dark forces have smashed business confidence, as measured by the South African Chamber of Commerce and Industry Business Confidence Index, to levels last experienced during the peak of the coronavirus-crisis.
The cost to the economy is still to be assessed but in KwaZulu-Natal alone the gross domestic product in this important economic region shrunk by more than R20 billion and job losses are approaching 200 000 and counting.
But the full impact of the mayhem and uncertainty on the country’s economic future is still unfolding. The debt of the South African government and its state-owned enterprises (SOEs) is already at unprecedented and unsustainable levels.
The relationship between the 10-year government bond yields of the major African countries and their political stability percentile ranks indicates that the South Africa 10-year government bond yield correctly reflects the country’s Political Stability Percentile Rank.
There is therefore a real risk that global investors may soon factor in a political stability percentile rank of pre-Ramaphosa in South Africa government 10-year bonds. It is thus possible that we may see the 10-year bond yield breaking 10 percent on the upside.
That will mean that due to repricing, the cost of new 10-year borrowings to the South African government and the SOEs could exceed 10 percent or more within the next few weeks. Tanzania’s 11.5 percent could also be matched. Yes, what is happening is the erosion of capital from a South African and global investor’s point of view.
The immediate economic damage impacts future investment and places South Africa’s economic developments in jeopardy. Those investors who committed billions will think twice before they make good on their talks. The domestic currency will reflect the precarious situation South Africa finds itself in and is extremely vulnerable to a further deterioration in perceptions about the country’s future.
In my opinion, the damage inflicted on the economy by the mayhem and ongoing uncertainty calls for the South African Reserve Bank to exercise restraint and to leave the bank rate unchanged despite a weakening rand.
The rise in long-term interest rates on the back of perceptions of higher political instability will also affect other financial markets in South Africa as risk premia on the equity and listed property markets will adjust accordingly.
South Africa can get out of this tightrope. The bigwigs should realise that the country’s security cannot be compromised and confidence in the security forces must be restored.
Inward investing by the savings industry has become critical for the economic survival of South Africa, while the realists in parliament should consolidate. Labour, and especially Cosatu, have a critical role to play to take the country forward.
South Africa is down but not out … yet.
Ryk de Klerk is an analyst-at-large. Contact [email protected] He is not a registered financial adviser and his views expressed above are his own. You should consult your broker and/or investment adviser for advice. Past performance is no guarantee of future results.
*The views expressed here are not necessarily those of IOL or of title sites