Facing external and internal challenges, Africa’s strongest economy has been unable to boost growth since the 2009 recession. China’s recent slowdown, lower commodity prices and Europe’s debt crisis - bearing in mind the EU is South Africa’s leading export destination – have affected South Africa’s export revenues. The depreciation of the Rand observed early 2012, due to dropping capital inflows which reflect global uncertainty, is expected to gradually continue. South Africa’s domestic sources of risk are entailed in the deficient education system combined with stubbornly high unemployment (25% of population) which is likely to become politically and socially unsustainable. The significant gap between real-wage growth and productivity growth does not only constrain international competitiveness, it simultaneously suppresses job creation. In addition, current domestic consumption levels are untenable because of high unsecured lending to already deeply indebted households. Political uncertainty has at present partially driven South Africa’s failure to attract sizeable investments given the lack of confidence in the government’s ability to contain union demands and growing populist economic rhetoric. In December 2012 the ANC – part of a tripartite alliance with the main labour unions and the communist party - will choose its presidential candidate. Growing polarization within the tripartite and increasing popular frustration towards the ANC’s lacking socio-economic policy raise the prospect for leadership instability.

Impact on country risk

Due to the external downturn, growth rates forecasts for South Africa during the next few years were recently revised downwards by the IMF with 2012 growth likely to reach a mere 2.6%. However, South Africa’s external solvency remains sound with sustainable public and external debt ratios which are dominated by domestic currency denominated liabilities. ONDD is currently not considering policy changes, although it is projected that South Africa will continue drifting below where it should be as an emerging market due to sluggish growth and policy uncertainty.

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