South Africa’s Political Challenges and Economic Silver Linings

While the economic data have improved modestly, we think that a worsening political backdrop for South Africa will ultimately keep the nation’s assets in the underperforming camp.

While the economic data have improved modestly, we think that a worsening political backdrop for South Africa will ultimately keep the nation’s assets in the underperforming camp.


Political unrest in South Africa is picking up as we enter what some jaded South African observers call “Strike Season.”  This refers to the annual rite of strikes and stoppages as wage negotiations start.  Wage negotiations are under way in the municipal sector following the expiry of a three-year agreement.  Negotiations in the gold and coal sector are also under way after a two-year wage deal expires.  South Africa’s 1.3 mln public servants are pondering a strike even as talks began after the expiration of a three-year wage deal.

We expect labor unrest to pick up, as unemployment remains stuck above 25%.  Relations between labor and management remain strained, and this comes after a year that was marred by work stoppages and strikes in the steel and platinum industries.  The platinum strike was the longest in South Africa’s history, running for five months and significantly harming the economy.

Trade union AMCU declared a dispute with gold producers over wages, as talks in the gold mining sector have been ongoing since late June.  Five gold producers (AngloGold Ashanti, Evander Gold Mines, Harmony, Sibanye Gold and Village Main Reef) are negotiating with four trade unions (the Association of Mineworkers and Construction Union (AMCU), National Union of Mineworkers (NUM), Solidarity, and Uasa).  No surprise, the unions are asking for big wage hikes even as the gold producers struggle with slumping prices.

President Zuma’s second and final term runs through 2019.  Zuma will likely back a key moderate to succeed him, such as Deputy President Cyril Ramaphosa.  The opposition Democratic Alliance (DA) won 22.2% of the vote in the 2014 elections, the highest on record.  It has chosen its first black leader, Mmusi Maimane, which will likely boost the party’s popularity further.

A key indicator ahead of 2019 will be municipal elections in 2016.  Can the DA build on its 2014 showing?  What about the radical ANC breakaway group Economic Freedom Fighters, led by Julius Malema?  It took 6.4% of the vote in 2014, and is taking part in municipal polls for the first time.  While neither group has any chance of toppling the ruling ANC anytime soon, the threats coming from both sides will certainly pressure the ANC.

The economic problems in South Africa are well documented, but there are some silver linings in the recent data.  Despite all the headwinds, retail sales has been holding up albeit at low levels, averaging around 2.5% y/y growth over the last couple of years.  This should be confirmed on Thursday when the May print comes out. Manufacturing production has been an especially weak spot, with large negative surprises in the last couple of months (-2.0% y/y in April and -1.4% y/y in May).  However, the June manufacturing PMI came in on the strong side at an expansionary 51.4, suggesting that there may be some improvement ahead.

There has also been some improvement in the external accounts.  The trade balance unexpectedly flipped to a surplus of ZAR5.0 bln in May, the highest level since last December, and far better than the May 2014 print of –ZAR 7.4bln.  This was driven by a near 15% y/y rise in exports.  The current account deficit fell to -4.8% of GDP in Q1 from -5.1% in the previous quarter, but much of that has come from the import side, which are contracting y/y.

Inflation is a different story.  CPI rose to 4.6% y/y in May, the highest level this year.  There is a lot of pressure from higher headline items such as food and electricity prices.  This puts the central bank in a tough spot.  GDP growth is expected to come in around 2.0% for the year and the unemployment rate is still around 25%.  Still, Deputy Governor Mminele already warned on the upside risks to inflation, specifically noting the impact of the weaker rand.  Since the SARB is very hands off when it comes to FX policy, the onus of adjustment falls upon monetary policy. Hikes are definitely a possibility later in the year, especially if the silver linings in the economy gain traction.

The growth outlook has downside risks.  Not only is the SARB potential resuming its tightening cycle, but the government is in the midst of fiscal tightening in an effort to ward off a ratings downgrade.  Our own sovereign rating model still views South Africa as a BB/Ba2/BB credit, and we see downgrade risks to actual ratings of BBB-/Baa2/BBB.