South Africa: End of Zuma era to bring reforms

28 February 2018

Cyril Ramaphosa was sworn in as South Africa’s president on 15 February 2018, and is expected to pursue a business-friendly reform agenda. However, the economic outlook will remain weak in 2018, as corruption investigations continue to deter foreign investment. Water infrastructure will be prioritised for investment as the Western Cape water crisis continues.

Security Environment

President Jacob Zuma resigned on 14 February 2018 following a leadership struggle in the ruling African National Congress (ANC). Zuma’s deputy, Cyril Ramaphosa, was sworn in as the country’s president on 15 February 2018. Over the coming months, there will be an elevated risk of protests among Zuma’s Zulu support base, centred in KwaZulu-Natal, particularly if they believe that Zuma is being unfairly pursued in corruption investigations. Zuma currently faces 783 corruption charges linked to a 1999 arms deal, and may stand trial in 2018.

However, support for Zuma is dwindling and protests are unlikely to be attended by more than a few hundred people in urban centres. Incidents are not likely to be violent or cause significant disruption for businesses.

Protests are also likely in South Africa in response to poor service provision. For example, in January 2018, hundreds of people protested outside a civic centre in Cape Town against the city authorities’ management of the ongoing water crisis. No violence was reported during the incident, although service-delivery protests can become violent. Protesters may throw stones at government buildings and/or establish road blockades. However, the risk to commercial assets is limited, as most protests will not occur in business areas.

Trading Environment

As president, Ramaphosa is expected to progress with business-friendly economic reforms. Since becoming ANC leader in December 2017, he has pursued a number of reforms, including replacing the board of state-owned utility company Eskom. Ramaphosa intends to create a million jobs in five years, introducing tax reform and creating special economic zones. However, Ramaphosa’s ability to restore investor confidence in South Africa will be limited by the country’s otherwise weak economic outlook.

The South African economy is currently forecasted to grow by 1.3% in 2018, and a Ramaphosa presidency is unlikely to have an immediate impact on this outlook. The ANC remains divided on key policy areas, with a significant wing of the party continuing to support expansionary fiscal policies. This will make it difficult for Ramaphosa to enact reform measures, and many are likely to be watered down. In addition, Ramaphosa must balance the need to please investors with pressure to rebuild public confidence in the ANC ahead of 2019’s general election.

The ongoing water crisis affecting Western Cape poses a further risk to South Africa’s economy. Severe dryweather is likely to impact the region’s wine industry, with yields estimated to fall by 20% this year. Given that Western Cape accounts for 13.6% of GDP, a prolonged water crisis has the potential to weigh on South Africa’s weak growth outlook in 2018.

Investment Environment

In light of the Western Cape water crisis, the government will prioritise investment into water infrastructure. In November 2017, Cape Town’s city authorities allocated USD 140 million for seven additional water projects, temporarily halting progress on any non-water projects. Moreover, in February 2018 the deputy mayor revealed plans for two temporary desalination plants in Cape
Town, which are currently at tender stage. The plants are expected to be operational in May 2018.

Foreign investors may be deterred from entering South Africa’s infrastructure sector by a challenging business environment. Allegations of ‘state capture’, in which Zuma is accused of facilitating Gupta family influence over state institutions, raise reputational risks for foreign firms. For example, major international firms have been implicated in malpractice accusations after working for companies linked to the Gupta family.

In late 2017, the corporate registry filed criminal complaints against McKinsey, KPMG South Africa and SAP over the companies’ work for Gupta-linked companies. McKinsey was accused of fraud and collusion after ignoring staff warnings about the legitimacy of firms linked to the Guptas, and in January 2018, state prosecutors indicated that they would enforce an order to seize.

Pricing Outlook South Africa

* Given political uncertainty in the country, the range in pricing reflects the diverging outlooks of underwriters

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Turkey, Russia, Argentina and Iraq all of which have been the subject of recent enquiries from JLT's client base.

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