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South Africa’s economy: cursed to live in interesting times

Current Affairs

South Africa’s economy: cursed to live in interesting times

These are trying times for the South African economy. High unemployment and low growth rates have been problems for many years but the prolonged downturn in the price of mining commodities has shaken the already weak economy. Once the current political crisis is thrown into the mix, the situation can look bleak. Yet there are signs for optimism if you know where to look. Report by Neil Ford.

The South African economy’s current trials and tribulations are both partly the cause and the result of the country’s ongoing political difficulties. The government has lurched from crisis to crisis under the presidency of Jacob Zuma, including over his use of public money to finance upgrades to his private Nkandla residence; and the allegations that he had allowed the Gupta family undue influence over government decisions – both of which would have forced most leaders from power. The latest controversy is having at least as much impact on his political position but has directly caused far more economic fallout.

Zuma sacked his finance minister, Pravin Gordhan, at the start of April, unleashing a wave of criticism from supposed allies and prompting Standard & Poor’s to relegate South Africa’s long-term foreign currency rating into junk status. Gordhan had served as finance minister from 2009 until 2014 and then again for another 16 months until his sacking. A heavyweight in the African National Congress (ANC), he was a major counterbalance against Zuma in government. ANC secretary general Gwede Mantashe cited the “irretrievable breakdown” in the relationship between the two men for the dismissal.

The Congress of South African Trade Unions (Cosatu), which is one of the main backers of the ANC, condemned the sacking. Secretary general Bheki Ntshalintshali said Zuma was no longer the “right
person” to serve as president and called his leadership “inattentive, negligent…and disruptive”. Deputy President Cyril Ramaphosa, who is one of the most likely candidates to take over from Zuma, described the sacking as “totally unacceptable”, while former Interim President Kgalema Motlanthe also criticised Zuma.

When Malusi Gigaba, who is regarded as more of a Zuma loyalist, was appointed to replace Gordhan, he said: “Changing a certain individual won’t cause a credit downgrade” but was quickly proved wrong when S&P moved to cut the country’s long-term foreign currency rating to BB+ from BBB-. The credit ratings agency cited “heightened political and institutional uncertainties that have arisen from the recent changes in executive leadership”. Within a day of the sacking, the rand had lost 11% of its value against the US dollar, reversing the gains that had been made in the first three months of this year.

The economic impact of the political drama was clear. Standard Bank said, with some justification, that the nation’s banks were strong enough to survive the downgrade. However, the managing director of the Banking Association of South Africa, Cas Coovadia, said: “The executive changes initiated by President Zuma have put at risk fiscal and growth outcomes. We must now recognise the crisis we are in. This sovereign downgrade will lead to a steep erosion of already poor levels of investor confidence.” Gigaba responded: “I’m not saying it’s easy to get out of a rating downgrade, yet I remain confident. Ultimately what these rating reviews underline is that we need to ignite the country’s growth engine. When I walked into the office on Friday they had already made their decision.”

The structural problems in the economy were there before Zuma came to power. Yet whatever the political rights and wrongs of the issue, the economy will continue to struggle as long as Zuma remains in power. The ANC will probably not lose the 2019 election but it is possible that it will gain less than 50% of the vote, particularly if it does not choose a credible reformist leader beforehand. The street protests that met Gordhan’s dismissal were described by several sources as the biggest anti-government demonstrations since the end of apartheid.

Countering wage inequality
According to the government’s data service, Statistics South Africa, average household income in 2015 was R138,168. However, this ranged from R92,893 ($6,875) for black South Africans, up to R444,446 ($32,895) for white citizens. Cosatu spokesperson Sizwe Pamla commented that current wages were the result of “an apartheid-inherited labour market system deliberately designed to exploit black people, and structured to ensure low wages for blacks”. The gross disparities in income are not only bad for society but also for the economy. Far too many people are struggling, with the result that they fail to make the most of their potential.

One method of countering this inequality would be through the introduction of a minimum wage. In November, Ramaphosa suggested a figure of R3,500 a month, or R20 an hour, be introduced in mid-2019. This would be a similar figure to that imposed in countries with an equivalent per capita GDP, but even if actually introduced, it would have to be enforced.

There are already minimum wages in specific sectors, such as for domestic workers, like cleaners and gardeners, but many wealthy South Africans still fail to pay their employees the minimum rates. Many businesses oppose the imposition of a minimum wage, arguing that it will destroy jobs. There is a big fear given that the unemployment rate is 27% and there is also a lot of underemployment, but minimum wages have not had this effect elsewhere in the world. In its An Economy for the 99 Percent report, Oxfam calculated that 60% of employed South Africans earn less than R5,000 a month after tax, while the assets of South Africa’s three richest men are greater than those of the poorest 50% of the whole population.

Oxfam SA executive director Sipho Mthathi said: “Such inequality is the sign of a broken economy, from global to local, and the lack of will from the government to change the status quo…They can build an economy where businesses pay their taxes and contribute to the wider good, where everyone is able to be healthy and educated and where poverty wages are a thing of the past.”

Sector focus: mining
It is against this backdrop of economic inequality that the government is seeking to adapt the Mining Charter, with the aim of encouraging a fairer distribution of wealth. The Charter is the industry’s contribution to overcoming the social and economic imbalances of the apartheid era. At present, at least 26% equity in all mining projects must be held by black empowerment
investors. Among a raft of changes, the government plans to insist that this threshold is met not just at the outset but throughout the course of any project.

As a result, if original empowerment investors sell their equity to a non-empowerment company, the other investors must sell their stakes to other empowerment interests. Pretoria will have the right to revoke mining licences if companies don’t comply but mining companies want a policy of “once empowered, always empowered”.

The chief executive of Anglo American, Mark Cutifani, said: “We’ve had an industry that’s been shrinking for 20 years. If we are going to stop the rot, we need a document and a framework that encourages investment. If it doesn’t serve the long-term interest of the industry, it won’t serve the interest of the country. They have to be one and the same.”

More needs to be done to break the link between economic inequality and racial background but the change to the law as it stands will discourage investment in the sector. Non-empowerment companies will have insecure tenure over their assets. Cutifani is also correct to say that the industry has been shrinking, at least in relation to the overall economy, although that contraction has now been going on for much longer. The mining industry’s contribution to GDP has fallen from 20% to 8% over the past 40 years.

Despite the political turmoil and its impact on the economy, the structure of the South African economy is sound – but it has been marking time for too long because of political uncertainties.

Low coal prices over the past three years have certainly hit the economy hard. Even volumes have fallen. Thermal and coking coal prices stood at around $80 a ton and $150 a ton in the first quarter of 2017. With output falling at many coal mines in the heart of the South African coal industry, Mpumalanga Province, this should encourage the development of the largely untapped Waterberg Basin. Prices for iron ore have been particularly volatile in recent months. From $38 a ton at the start of 2016, they rose sharply to reach $95 a ton in February before falling away to $68 a ton by early April. This complicates Anglo American’s desire to sell its South African iron ore producer, Kumba Iron Ore, which is by far the biggest iron ore producer in the country. On a more positive note, prices and demand for manganese have held up well.

While the economy remains overly dependent on unpredictable mining commodity prices, the government is keen to encourage the emergence of a far bigger manufacturing sector. This would both
create jobs and diversify the economy. Pretoria has set up special economic zones (SEZs), which offer a low corporation tax of 15% and a range of other tax benefits. Five SEZs were established in 2014: Musina-Makhado, Dube Tradeport, Coega and East London in the Eastern Cape; and Richards Bay in KwaZulu-Natal.

Minister of Trade and Industry Rob Davies said: “The Special Economic Zones Programme is aimed at accelerating economic growth and development in designated regions of the country. The key measures of performance for the programme include increasing foreign and domestic direct investments, increasing value added exports, creating jobs, building industrial clusters and regional industrial hubs.”

The automotive sector is one of the stand-out success stories in the economy. The National Association of Automobile Manufacturers of South Africa predicts a 48% rise in the number of vehicles produced between 2015 and 2020, reaching 900,000 units a year by 2020.

Ford, BMW and Toyota are expanding their established operations in the country, while Beijing Automotive International Corporation (BAIC) signed a deal in August to set up a new R11bn ($819m) factory in Coega Industrial Zone in the Eastern Cape.

Renewable energy
Wind power has proved most attractive in the first instance. Johan van den Berg, the CEO of the South African Wind Energy Association, commented: “Wind energy is still a relatively new industry in South Africa and what we have achieved in such a short time is a sure indication of how much more we can do. In 2011 there were just 10 turbines in the country – now we have 13 large wind farms in operation, consisting of over 495 turbines, with many more under construction.”

While South Africa is following in the footsteps of many other countries around the world in promoting solar photovoltaics (PV), it is seeking to take the lead on concentrated solar power (CSP). While PV technology involves transforming the energy from light into electricity, CSP uses the sun’s rays to heat liquids that are then used to drive turbines, in the same way as coal, gas or oil-fired power plants. South Africa was one of the two biggest investors in the technology in the world last year.

There is already 100 MW of operational CSP capacity in the country and another 400 MW will soon become available. Apart from satisfying domestic demand, Pretoria hopes that the country can become a leading global supplier of CSP technology.

While the current political turmoil and its immediate impact on the economy is making all the headlines, the structure of the South African economy is sound – but it has been marking time for too long because of political uncertainties. The African giant is wobbling but is very unlikely to topple over.

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