Investor interest in South Africa will remain subdued in the medium-term, as political infighting in the ruling African National Congress (ANC) prevents economic reforms. Sovereign credit risks will become elevated as the government looks set to abandon fiscal consolidation measures. The mining sector will continue to face elevated levels of strike action, whilst regulatory uncertainty will hamper investor confidence.
South Africa’s political environment will be dominated in late 2017 by the ANC’s elective conference on 16-20 December 2017. The ANC is set to choose a successor to its current leader Jacob Zuma. Zuma’s preferred successor is his ex-wife Nkosazana Dlamini-Zuma, whilst Zuma critic and Deputy President Cyril Ramaphosa will represent a more business-friendly, reformist wing of the party. On 17 October 2017, Zuma implemented a cabinet reshuffle. The removal of Zuma’s remaining critics has widely been seen as an attempt to strengthen Dlamini- Zuma’s position ahead of the conference. Regardless of the election result, party infighting is likely to continue into 2018, hampering effective policymaking.
In recent years, the mining sector has experienced periods of significant unrest. In 2014, 70,000 Association of Mineworkers and Construction Union (AMCU) platinum workers went on strike for 5 months demanding wage rises, leading to industry losses of ZAR 24 billion. Whilst the frequency and severity of industrial action in the mining sector has decreased in 2017, conditions remain ripe for further unrest. In the last 5 years, approximately 70,000 jobs have been lost in the sector and in June 2017 AngloGold Ashanti announced that it planned to lay-off 8,500 workers.
South Africa’s economy is forecasted to grow by 0.8% y-o-y in 2017, up from 0.3% in 2016. A more robust recovery will be prevented by the government’s shift towards radical and populist policy positions. For example, at an ANC conference in July 2017, Zuma stated his support for land expropriation without compensation. Political uncertainty will also weigh on foreign investment after the December 2017 elective conference. Even if Ramaphosa wins the party leadership, his ability to implement economic and business reforms would be limited as the party will remain deeply divided over economic policy, keeping investors on the side-lines.
Finance Minister Malusi Gigaba unveiled South Africa’s medium-term budget on 25 October 2017, revealing significant fiscal slippage.
The fiscal deficit is forecasted to reach 4.3% of GDP in 2017/18, marking a significant rise on the previous estimate of 3.4%. The medium-term budget also indicated that the Treasury is now forecasting a budget deficit of 3.9% of GDP over the next three years, despite having previously projected years of fiscal consolidation. This will have implications for debt sustainability, as public debt is now forecasted to reach 60% of GDP by 2021.
Focus will now shift to the February 2018 budget, where investors will be keen to see renewed commitment to fiscal consolidation measures. Increased spending ahead of the 2019 elections signifies that an adjustment on the expenditure side will be difficult to secure and debt sustainability will remain at risk.
Corruption continues to undermine the investment environment in South Africa, and President Zuma is facing growing accusations that he uses access to public institutions to promote private interests. Under particular scrutiny are Zuma’s links to the Gupta family. Reportedly, documents were leaked in May 2017 suggesting that tenders for South Africa’s electricity public utility Eskom were rubber-stamped to favour Gupta and Zuma business interests.
Pressure on Zuma over corruption allegations will continue to rise, although if elected party leader Dlamini-Zuma may shield him from further investigation. In contrast, Ramaphosa has been critical of Zuma’s links to the Gupta family and may work to oust him from the presidency before the end of his term in 2019.
Investor interest in South Africa’s mining sector is likely to remain subdued, as the effects of a low price environment are exacerbated by unfavourable regulatory conditions. In June 2017, the government published an amended mining charter.
The revised charter has increased compliance costs for firms, raising the mandated rate of black ownership from 26% to 30% and stipulating that 1% of annual turnover must be paid to the Mining Transformation and Development Agency. The legality of the updated charter was challenged by industry body, the Chamber of Mines, leading the government to delay its implementation until a court ruling, which is due in December 2017.
** Pricing on South Africa will significantly differ according to the associated sector and will be considered on a case by case basis.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Zimbabwe, Chile, Saudi Arabia and Cameroon, all of which have been the subject of recent enquiries from JLT's client base.
The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.
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