Risk drivers and outlook

Since the end of apartheid, South Africa has experienced a political transformation and an economic bonanza, fuelled by an international commodity boom, a flourishing service sector and high credit-funded household consumption. In 2009 the country was struck by the global financial crisis, which lead to the country’s first recession in 16 years.

Ever since, economic recovery has been hindered by the European crisis, slow growth in the USA and a slowdown in Chinese commodity demand. The untenable unemployment rate, deficient skilled labour, infrastructure bottlenecks and the insufficient investment rate constitute structural weaknesses that depress South Africa’s external competitiveness. Moreover, a tradition of soaring union wage-demands and the erratic outbreak of violent labour unrest, cause additional reputational damage. Consequently, profound structural reforms and political courage will be needed for unlocking South Africa’s potential. Nevertheless, incentives are questionable knowing President Zuma is widely expected to secure a second term in the 2014 elections due to the ANC’s continued dominance despite emerging cynicism towards the ruling elite.

As of next year, growth is projected to slightly rebound, driven by a probable modest global growth revival and large public infrastructure projects. However, due to a lack of adequate fiscal space and little room for loose monetary policies, there is still a risk for continued stagnating growth. Moreover, large capital outflows - in case of a vast liquidity rush back to safe Western yields – could pose a serious risk for South Africa’s fiscal and external solvability.

As for the moderate middle- to long term-political risk ( in category 3), South Africa’s lower competitiveness, insufficient domestic investments and moderate but rising external debt ratios, do influence ONDD’s risk appreciation, yet the deterioration is not of such an extent that a downgrade is being envisaged. The short-term political risk is in category 3 given the adequate liquidity position. The country’s systemic commercial risk classification leans upon its excellent business environment and mature institutions. However, as inflation breached the ceiling of its target band and the SAF rand continues to depreciate amid a slow-growth path, the systemic commercial risk categorisation could be revised downward.

Facts & figures


  • Abundant natural resources
  • Mature institutions (legal protection, doing business environment, …)
  • Strong service sector
  • Flawless payment morality record


  • High unemployment and inequality (feeds civil unrest)
  • Exposed to commodity price shocks
  • Infrastructure bottlenecks (especially energy)
  • Reliant on volatile capital inflows

Main export products

  • Manufactured goods (43.4% of current account receipts), tourism (8.7%), gold (8.4%)

Income group

  • Upper Middle Income

Per capita Income (USD)

  • 6960 USD


  • 50.6 M

Description of electoral system

  • Presidential: 5-year term; next election: 2014
  • Legislative: 5-year term; next election: 2014

Head of State and Government

  • President Jacob Zuma

Country risk assessment

Spreading social unrest amid creeping disaffection with ANC

Since the end of apartheid, South Africa experienced a political transformation and an economic bonanza. In 1994, the country became a democracy as it held its first all-race elections that were convincingly won by ANC, a tripartite alliance between the ANC (African National Congress), the main labour unions (COSATU) and the communist party (SACP). Since then, every election (1999, 2004 and 2009) has been dominated by the ANC, the party that symbolised independence and freedom for the vast majority of the population.

Current President Jacob Zuma was sworn in as President in 2009 for a five-year term, after defeating Thabo Mbeki at the ANC leadership conference in 2007. It remains highly likely for the ANC to win the 2014 general elections – in which Jacob Zuma will run for a second term - yet popular discontent over lacking socio-economic policies and political in-fighting might get in the way of the usual crushing majority. Disillusionment with the ANC is growing as people’s grievances are left largely unsolved after almost 20 years of governance. While poverty and joblessness have kept growing, scandals on corruption and misappropriation of funds have become increasingly rife. The ideal breeding ground for social and labour unrest has been fostered by the deficient educational system, unemployment that reaches 25% of the labour force, rising living costs and even more blatant income inequality.

Over the past few months several new opposition parties have been created but due to fragmentation and their limited scale they are destined to play only a minor role. However, the largest opposition party, The Democratic Alliance (DA), is expected to perform relatively well in 2014 as it emerged a credible competitor during the 2011 municipal elections, when they won in Western Cape. Nevertheless, despite mounting grievances, the DA is unlikely to threat the ANC dominance as the DA mainly draws white and mixed-race voters, while the ANC still benefits from the votes of the majority, the black community.

On 16 August 2012 one of the most violent events in post-apartheid South Africa took place when 3000 miners demanding higher salaries in an illegal strike clashed with police forces, and 40 miners were killed at Lonmin’s Marikana platinum mine. The strike emanated from long-time discontent, yet more directly  from rivalry between a militarised populist splinter union (AMCU) and the established union (NUM, the mining section of COSATU), who is accused of being out of touch with the workers’ needs as they pair off with the elite through the COSATU-ANC governing alliance. In 2013, platinum and gold mining unrest rumbles on while spilling over to diverse sectors and sparking numerous social actions and wildcat strikes over wage demands. These actions prove especially harmful to mining operations and are damaging confidence among international investors. The labour strife has already cost the mining sector billions of dollars in lost output while the wavering economy is being squeezed by spreading industrial action (in the car manufacture sector, airports, petrol stations, farms). Unfortunately, more trouble is expected in the near future.

Low stagnating growth proves tricky to rehabilitate

Since 1994, South Africa has had a track record of very strong growth based on its natural wealth and diversified economy, its strong policy framework and impressive institution building. In 2008-09 the global financial crisis dealt a huge blow to the South African economy. It suffered its first recession in 16 years caused by what was once an advantage: deep integration with the world economy. Economic recovery was hindered by domestic and external factors. Consequently, average growth since 2009 has reached a mere 3% and is forecast to reach a meagre 2% in 2013.


On the domestic side, growth has been weighed down by serious structural weaknesses (see below) and lower private consumption caused by low job creation, inflationary strains and weaker consumer confidence due to economic and political cynicism and high household indebtedness. After all, credit- funded consumer spending was the main domestic growth driver pre-2008. It left “household debt to disposable income ratio” to reach a high level of nearly 75%, which can endanger financial stability as the exposure of banks to highly indebted households accounts for up to 45% of banks’ loans.

External factors also have a big hand in South Africa’s slowdown, with crisis-hit Europe being the country’s main trading partner for manufactured goods. At the same time, global commodity prices are trending generally sideways to downwards, while labour unrest and high input costs are putting pressure on competitiveness of the all-important mining sector. For years now, the sector has been losing importance due to maturing mines (gold output fell by 50% over the last decade).

In 2014, year on year growth is projected to moderately rebound and reach 2.9%, driven by a modest global growth revival and public infrastructure projects under the ‘National Development Plan’ (NDP). There is conversely still a risk for ‘stagflation’ –low growth and high inflation-, caused by a lack of fiscal space for growth-enhancing policies and by a monetary policy reaching its limits with historically low interest rates and inflationary pressure (see below).

Structural weaknesses hinder headway

The South African economy faces considerable structural challenges that are mainly reflected in the fact that it has one of the world’s largest unemployment and inequality rates. Compared with peer emerging markets (EM’s), unemployment is particularly problematic in South Africa, affecting 25% of the total labour force and even 50% of youths.

A poor educational system together with a profound skills mismatch contribute to this excessive unemployment. The shortage of skilled labour has become more problematic as the growing importance of the service sector has made labour demand move away from unskilled labour (especially in mining) towards skilled labour. Moreover, the tradition of mid-year collective bargaining by strong labour unions  has been contributing to above-market wage settlements. Hence, the growing gap between real wages  and productivity, together with high complexity of hiring, have made the economy’s competitiveness crumble and have undermined private sector job-creation. Another weakness lies in the insufficient investment rate (still below 20% of GDP) which jeopardizes growth potential. The national saving rate, which reached a historic low of 13.2% of GDP in 2012, is also deficient. As a consequence, South Africa is dependent on foreign investment financing that leaves the country exposed to volatile capital flows.


Infrastructure bottlenecks, especially the lacking supply of electricity, discourage companies to invest. Eskom, the state-owned utility company that generates 95% of all used electricity, has failed to keep up with the pace of fast growing energy demand. Due to years of underinvestment in the power system, the thin power-supply margin and severely disruptive power outages are causing economic distress. South Africa is one of the world’s most coal-dependent countries, using it for electricity and even for powering cars. Five years ago, new coal-fired power plants were built to increase electricity supply, and prices for electricity have hiked with an average 25% per year to attract investors. However, due to vast delays of over 3 years, the new power plants are still not producing and power supply remains tight. Last year, USD 5.5 billion was assigned to attracting investors in wind and solar energy (renewables should account for 9% of the energy mix by 2030), as coal is one of the most polluting fossil fuels and the country is in great and urgent need for much more electricity.

Still, the country boasts many advantages for investors such as its mature and trustworthy institutions, its position as a gateway to the African continent and its well-diversified economy. Economic activity  especially comes from services (retail trade, finance, transport, real estate, tourism etc.) and secondly from manufacturing, yet with huge resources of iron ore, coal and platinum, the mining sector still holds massive potential as well. However, structural reforms and political courage will be the key for unlocking South Africa’s potential. Gradually, policy reforms are being introduced to tackle pessimism among investors caused by South Africa’s policy uncertainty, high wage demands and global gloominess – that has been restraining significant long term investments. The National development Plan (NDP) – including labour and product market reforms - was endorsed late 2012 as a pathway to structural reforms, while during the last ANC conference ‘nationalisation talks’ were officially dismissed at the discussion table. Despite the   obvious efforts for tackling investors’ aversion, scepticism remains prevalent given the government’s weak implementation record. Clearly not unjustified; progress towards putting the NDP into practice has been distressingly slow.

External balances on bad track, yet debt ratios remain bearable

The structural current account deficit has widened to 6.3% of GDP in 2012 from 2.8% in 2010. Despite a re-orientation away from Europe and towards Asia and Sub-Saharan Africa in 2012, export volumes have stagnated, while investment- and consumption-related imports have surged. As a BRICS member, competition from other member countries proved harsh for South Africa. Many consumers switched to cheaper Chinese imports, creating a trade deficit with China of USD 4 billion (half of total trade deficit in 2013), while the trade deficit with Brazil nearly reaches 1 billion USD, as South Africa became a net food importer. Even though rand depreciation (see below) should help reduce the current account gap,  structural domestic weaknesses are expected to keep external competitiveness fragile should reforms stay absent.

To finance its current account deficit, South Africa is highly reliant on foreign capital inflows - dominated by foreign portfolio purchases of local equities/bonds and short term bank loans. Over the past three years, abundant global liquidity provided easy financing for EM’s, but the recent reversal of capital flows is posing a threat to South Africa’s external balance. EM currencies in general have taken a beating the past four months due to investors rushing back to safer assets given the possibility for the US watering down its unconventional monetary stimulus policy towards higher long-term US yields. At the same time the financial account is also affected by rising outward foreign direct investment (FDI) from South Africa towards Sub-Saharan Africa, while FDI inflows are declining due to low investor confidence. In the near term, large capital outflows could pose a serious risk for South Africa’s fiscal and external solvability.

Yet South Africa’s total external debt remains manageable even though it is increasing fast (28.4% of GDP in 2011 and projected at 35.3% in 2013). More than half of its foreign-held debt is rand-denominated,  which filters out the bare convertibility risk. So far, the country’s ability to pay is not being doubted, particularly when one takes into account the country’s flawless payment morality record.

Since the 2009 global downturn, fiscal deficits averaged around 5% of GDP following the fiscal stimulus to boost subdued growth and the cyclical decline in tax revenues. Subsequently, government debt is on the rise, going from 31.3% to 43% of GDP (largely domestically financed) over the past five years. High  current public expenditure - partly due to a near-doubling of the wage-bill - together with capital investment commitments in the National Development Plan (NDP), will sustain pressure on the fiscal balance. Besides, more political pressure for mounting public current spending is probable with the 2014 elections looming. Fiscal consolidation – as announced for the 2013/14 fiscal year - to stabilise public debt, rebuild fiscal buffers and implement spending efficiency reforms, will therefore be essential but difficult to achieve.

Delicate balancing act for monetary policymakers

South Africa has one of the most sophisticated and well-regulated capital markets in the world, a resilient financial system supported by a well-defined legal system. Nevertheless, as previously mentioned, the rapid expansion of credit to highly leveraged households has increased the credit risk.


Between July 2012 and July 2013, the South African rand lost about 20% of its nominal value against the USD dollar. The rand tumbled to a four-year low due to the widening deficit and deteriorating labour unrest. However, the rand’s weakness - in conjunction with currency turmoil in India, Brazil and Indonesia - is partly blamed on the implications of a potential ending of the US Federal Reserve’s loose monetary policy. For years this money easily found its way to EM’s, where high-yield financial investments became a perfect substitute for western government bonds.

Rand volatility in the near term is expected. Nevertheless, the government has no plans to defend its weak currency, as the South African Reserves Bank (SARB) will continue to refrain from selling foreign exchange reserves, which currently cover 3.6 months of imports, an adequate liquidity position. Moreover, one year ago, the rand was generally viewed as being overvalued, which creates the impression that the country is not experiencing a genuine currency crisis. Nonetheless, the depreciation of the rand does worsen inflation, which leaves monetary authorities in a balancing-act between keeping inflation in check and boosting lacklustre growth. In July 2013, inflation was pushed up to 6.3%, meaning it breached the ceiling of the 3-6 percent target band. To stop money from flowing out of the economy and to curb inflationary pressure, the SARB might see incentives for raising interest rates. However, in the near term an interest hike seems unlikely as it would decelerate already sluggish growth.

Analyst: Louise Van Cauwenbergh, l.vancauwenbergh@credendogroup.com