South Africa: Political infighting risks economic stagnation

31 January 2017

Growing public discontent will heighten the risk of protests in South Africa in 2017. Economic growth will be hampered by political infighting, with revenue shortfalls further elevating sovereign credit risks. The fragile financial position of the country’s state-owned enterprises (SOEs) will drag on opportunities for investors in the infrastructure sector.

Security Environment

Labour disputes and socio-economic grievances often lead to strikes, riots and civil commotion in South Africa, with elevated risks of property damage and business interruption for private companies. Labour strikes are likely to affect the mining sector in particular in the one year outlook, as trade unions compete for influence in order to increase membership. In January 2017, 1,700 workers staged a sit-in strike at Kusasalethu gold mine west of Johannesburg, demanding payment of bonuses and the sacking of the mine’s general manager. Such incidents often turn violent, leading to arson and property damage.

Grievances with the ruling African National Congress (ANC) raise the likelihood of public protests in the short to medium term, particularly in urban centres such as Johannesburg, Cape Town and Durban. In September and October 2016 student protests broke out across the country over a proposed 8% hike in tuition fees. A number of demonstrations turned violent as students attacked police and set fire to university buildings, causing an estimated USD 44 million of property damage.

Trading Environment

Political infighting in the ANC will weigh on South Africa’s economic performance in 2017, as focus shifts to the December elective conference and reforms stall. President Zuma also continues to oppose Finance Minister Pravin Gordhan’s efforts at reform in key SOEs. As a result, real GDP growth in 2017 will only see a moderate acceleration, rising to 1.1% from 0.5% in 2016. The fiscal deficit is expected to be 3.8% of GDP in FY2016/17, above the government target of 3.2%. A ZAR 36 billion tax shortfall is forecasted in 2017/18. There is also a high risk of further fiscal slippage in the next 12 months, as the ANC may begin to use additional spending to bolster support ahead of the 2019 election.

Low growth and limited fiscal reform will likely lead to a downgrade by major credit ratings agencies in the 12-month outlook. In late 2016, the country was spared a downgrade into junk status due to confidence in the government’s reform agenda. Political inertia will now cause the ratings agencies to amend their position. A downgrade would raise foreign debt servicing costs and elevate non-payment risks, due to increased borrowing costs and a likely weakening of the rand. The impact would be most keenly felt in SOEs, where around 40% of debt is held in foreign currency.

Investment Environment

Political uncertainty will drag on growth in the construction sector in the medium term as investor confidence wavers. Although construction sector growth is forecasted to rise moderately from 1.6% in 2016 to 2.1% in 2017, private investors have become wary of graft and the ability of SOEs to meet their debt obligations. In August 2016 South African firm Future growth Asset Management suspended loans to six SOEs, including Eskom and rail firm Transnet, over governance concerns. Over the long term, large scale planned investment in port and rail infrastructure could provide opportunities for investors, although the government’s fragile financial position will likely see investment plans moderated. Transnet has already reduced its planned infrastructure investment up to 2019 from ZAR 336 billion to ZAR 277.8 billion.

Corruption risks are elevated for companies in South Africa. In November 2016 a report released by a former Public Protector outlined evidence of cronyism and corrupt business practises at the top of the South African government, substantiating corruption allegations that have been levelled at President Jacob Zuma for a number of years. 

CPS Risk Outlook Feb 17

In this month’s Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for South Korea, Brazil, Kenya and the Democratic Republic of Congo, all of which have been the subject of recent enquiries from JLT’s client base. 

Risks in South Africa impacting daily trade and investment

Download February Risk Outlook

For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email