South Africa will go to the polls to vote in a general election on May 8, 2019. There is a strong likelihood that the ruling African National Congress (ANC) will fail to win an outright majority for the first time in its history. Incumbent President Cyril Ramaphosa is likely to retain his position, but without an outright majority his administration will struggle to initiate pro-business reforms.
Social discontent continues to rise in South Africa amid an on-going water and electricity supply crisis. National power outages of up to 12 hours at a time have crippled the transport network, affected hospitals and caused significant losses for both local and foreign businesses.
Strikes, riots, civil commotion and crime are highly likely in 2019 unless urgent steps are taken to address the crises.
The proposed breakup of the national energy supplier is likely to result in union strikes that will disrupt the mining and industrial sectors in the one year outlook.
Mines without an independent electricity supply in the Northern Cape, North West, Mpumalanga, and Limpopo provinces would be at highest risk of disruption.
In April 2019, the Association of Mineworkers and Construction Union (AMCU) ended five months of violent wage strikes at significant gold mines in Gauteng and Free State, in which at least nine workers died.
The disruption caused losses of approximately US$115 million to the affected foreign mining firm.
The South African economy is slowly recovering after slipping into recession at the beginning of Q3 2018. Foreign investment in the extractive industry remains sluggish and GDP growth is forecast to reach just 1.3% in 2019, up from 0.5% in 2018.
Growth will be supported by robust performance and growth of 0.4% in the agricultural sector, as weather conditions are expected to remain favourable.
However there will be limited room for policy stimulus during 2019 with the fiscal deficit set to average 4.3% of GDP during 2019-21 and public sector debt edging closer to 60% of GDP over the same period.
If elected Ramaphosa has promised a new deal to kick-start the economy. The central points of the deal are pledges to address inefficient state-owned entities (SOEs), create one million jobs within five years, continue an anti-corruption drive, and enact land reform that extends property rights to black citizens.
Ramaphosa has already demonstrated pragmatism by announcing plans to break up the failing state energy supplier into three separate entities.
Following a decade of government corruption under the previous administration, Ramaphosa’s recent actions should inspire investor confidence that he will manage inefficient SOEs effectively provided he is elected on May 8, 2019.
South Africa’s debt position will remain challenging in 2019. The country’s debt servicing costs have risen markedly since 2016, in light of rand depreciation, rising global interest rates and the absence of meaningful fiscal consolidation measures.
As a result, debt servicing is expected to be the fastest growing area for spending, with obligations forecasted to rise by an annual average of 10.6% between 2018/19 and 2021/22.
Despite proposed reforms to the state energy supplier, the company’s financial troubles will continue to impact the government’s fiscal position.
The firm posted a ZAR11.2 billion loss in the 12-months to March 2019, with a total ZAR419 billion of debt.
Significant operational challenges will exist for foreign firms in 2019, with power outages likely to be a frequent occurrence.
The heavily indebted state electricity supplier officially has a generation capacity of up to 45,000 megawatts (MW) but the latest failures meant that it could not service demand of 27,000 MW in March 2019.
In Johannesburg, power outages are severely hampering business activity, with blackouts lasting up to six hours. South Africa’s national energy regulator has estimated the cost of lost power to the economy at US$140 million a day.
Contract alteration risks have increased since the introduction of a new mining charter in 2018. The charter includes provisions to increase black ownership requirements for foreign mining firms from 26% to 30%.
Moreover, 50% of company boards must be comprised of black representatives, 20% of which must be female.
Similarly procurement of mining-related goods and services has been set at 70% and 80% from black-owned companies, respectively. The question of land reform continues to pose significant risks to foreign investment.
A failure to win an outright majority in the general election would prompt hard-line factions of the ANC to pressure Ramaphosa to form a coalition with the Economic Freedom Fighters (EFF).
The EFF, a hard-left offshoot of the ANC has called for land expropriation without compensation, a move that would deter significant foreign investment.
The monthly Risk Outlook is supported by our 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.
5 Key Takeaways
- There is a strong likelihood that the ruling African National Congress (ANC) will fail to win an outright majority in the general election on 8 May, 2019
- Rolling electricity blackouts are costing the economy US$140 million a day
- The breakup of the national energy supplier is likely to result in union strikes that will disrupt the mining and industrial sectors in the one year outlook
- Contract alteration risks have increased since the introduction of a new mining charter in 2018
- Debt-serving obligations will rise by an annual average of 10.6% between 2018/19 and 2021/22.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Brazil, Egypt, Mexico and Ghana, all of which have been the subject of recent enquiries from our client base.
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