No surprises in South African elections

The biggest surprise from South Africa’s 2014 national election results was that there were no real surprises. “Most analysts expected the incumbent African National Congress (ANC) to secure a landslide victory with a slightly eroded majority and that is exactly what happened,” said Chris Hart, Economist and Chief Strategist at Investment Solutions. Unlike many of its African peers, South Africa now boasts five consecutive ‘free and fair’ elections, largely thanks to the broad acceptance of democratic principles by its citizenry. But large majorities like that secured by the ANC—with 62.15% of the national vote versus the Democratic Alliance’s 22.23%—present a different set of challenges. Much hinges, for example, on how the ruling party handles the Public Protector’s report on security upgrades to President Jacob Zuma’s Nkandla homestead. “If Nkandla is dealt with expediently then institutions such as the National Prosecuting Authority, the Public Protector, the judiciary and the police will have been compromised,” said Mr Hart. “And if that happens we risk becoming a tainted democracy.”hideAt an operational level, the new Cabinet members, who were sworn in on Monday, 26 May, face similar challenges to their predecessors. Top among these is government’s apparent inability to execute in key strategic areas like job creation, healthcare and education. “We hope that things will get better, but thus far there is nothing to suggest that the capacity of the state has improved,” said Ian Kirk, CEO of short-term insurer Santam. After more than two decades of ANC rule it is increasingly clear that political stability does not translate into investor confidence. “Portfolio flows into South Africa are much larger, relatively speaking, than those into other African economies; but this is largely attributed to our world class financial markets and institutions,” said Dawie Roodt, Chief Economist at Efficient Group. Investors can withdraw their capital instantaneously at the slightest provocation. “Even a risky destination such as Mozambique does much better than us in terms of real foreign direct investment,” he said. And recent legislation that limits foreign investor ownership of South African security companies to just 49% and requires new oil and gas exploration companies to cede 20% of their business to the state will exacerbate the situation. What about risks? “We are broadly looking at the same set of risks before and after the elections,” said Wikus Luus, Chief Risk Officer at Hollard Insurance. “While we do not expect much change in the risk landscape over the short term there are some fundamental issues that business, government and labour will have to address to prevent certain risks spiralling out of control.” He singled out the poor economic growth outlook as a top business risk. Exchange rate risk grows among others Lacklustre gross domestic product (GDP) growth of just 1.9% in 2013 coupled with a 0.6% contraction in the first quarter of 2014 will do little to address the country’s burgeoning unemployment. Both Mr Hart (who warned that there is a very real risk for a second consecutive quarter of negative growth in 2014) and Mr Roodt expect the economy to perform worse this year than last year. “If 2014 GDP comes in at 1.5%, as we expect it to, all sort of important ratios start getting out of line,” said Mr Roodt. “The current account deficit and fiscal deficit soar and government’s fiscal debt soon exceeds 50%.” Ratings agencies could issue further debt downgrades with the result interest rates go up, the rand weakens further and the current account becomes a problem. “The GDP growth outlook is the dividend from the policy path that we have followed over the previous five years,” said Mr Hart. He said that aside from slow growth the further encroachment of government into the private sector presents major challenges. “Another major risk is the constantly weakening rand,” said Mr Hart. “This will only get worse under a stumble along scenario where we face constant downgrades and no political will to turn the situation around.” Under these conditions, the South African Reserve Bank will have its hands full. Known for its tough inflation- targeting methodology, the central bank may have to resist raising interest rates despite the inflationary pressures caused by a softer rand. “Although we expect the bank to delay hiking interest rates due to the poor economic growth outlook, we are undoubtedly at the beginning of an interest rate hiking cycle,” Mr Hart said. Under this scenario, stagflation—where interest rates are too low relative to the inflation rate and costs rise despite a weak economy—becomes a real risk too. Mr Kirk said the election had little to no bearing on the major risks that businesses face locally. His top concerns include slow growth, the volatile currency, new legislation and shortcomings in the built environment. Businesses also have to contend with corruption, crime, governance failures and social unrest, to name but a few. From an insurer’s perspective, catastrophe exposure, climate change and on-the-ground risk due to poor municipal infrastructure remain uppermost. “South Africa’s infrastructure is crumbling and we are not doing enough to maintain it,” said Mr Roodt. He estimated that if state power utility Eskom had been able to meet electricity demand in the past decade the economy would be up to 10% larger (R300bn) than it is. Electricity supply was shortlisted as a major business risk in 2008, but the risk has subsided due to Eskom’s consistent approach to dealing with shortages. “Insurers were much more exposed back in 2008 than we are today,” said Mr Kirk. He added that the major concern around power supply and infrastructure has shifted from the insurance sector to the general economy. This risk has been replaced to an extent by labour unrest in the platinum belt. A massive sector-wide strike has decimated mining production and wiped out incomes in multiple downstream firms. “This labour unrest has a tangible impact on growth, which in turn impacts the quantum of insurable interests in the country,” he said. “If the economy is growing, then the need for insurance cover and the value of our insured interests grow—if the economy shrinks, then the opposite holds.” Insurance gap widens Aside from the thousands of affected mineworkers, there are scores of Rustenburg-based businesses that are feeling the squeeze, with the result that both individual and corporate insurance consumers are allowing their life policies to lapse or simply abandoning their short-term insurance covers. In 2012/2013 the ANC and government adopted the National Development Plan (NDP) as the blueprint for future economic and socioeconomic strategy development. Although business has bought into the plan it is not yet clear whether the NDP can save South Africa Inc. “The NDP is certainly a credible plan,” said Mr Kirk. “The big issue is whether we have the capacity in terms of infrastructure, funding and project management skills to implement it.” Mr Roodt said the problem with the NDP is twofold. First, there is limited capacity to implement it, and secondly, there is ideological confusion among the ANC’s alliance partners. The trick to the successful implementation of the NDP is to allow the economic side to lead. “Government should take care of the wealth creation aspects in the plan before turning its attention to the consumption part of it,” said Mr Hart. Unfortunately, the consensus currently lies on the social side of the plan, with alliance partners squabbling over how best to right the economy. NDP or not, there are many challenges that South Africa will have to address to become a destination of choice. Mr Roodt rattled off a long list: a large and ineffective civil service that has become a hindrance to virtually every sector of the economy; huge structural issues in the labour market; a skills deficit that is a drag on the economy; and an imbalance between consumption and production. The good news is that South Africa remains in a different league to its African peers. Its financial markets are well regulated, liquid and integrate seamlessly with financial institutions, while its banks are as sophisticated and well capitalised as anywhere else in the world. Lots of plus points “There is a ton of potential in South Africa and if you look through the noise that the newswires are carrying you will discover a financial services industry that is world class,” said Mr Luus. “And the uncertainty in the unionised industries is somewhat offset by our stable political and policy framework.” “On the minus side South Africa has major structural risks that must be addressed to deliver sufficient growth to tackle its social ills,” concluded Mr Hart. He believes that the consequences of failing in this endeavour will either be in the form of a social revolution or by way of further punitive measures against the wealth-producing sector of the economy. “Clearly the biggest threat to South Africa Inc is for us to muddle through the next five years in much the same way as we have over the last five,” he said. “What the country needs is for somebody to take the reins and demonstrate true leadership to get it going again.” Mr Roodt offered a similar recipe for success: “We need a strong political leader who is guided by individuals with a deep understanding of their respective portfolios…These ministers should avoid focusing narrowly on their service delivery achievements and pay more attention to the economic truths. Economic growth is the only thing that will deliver sustainable job growth and should be adopted by all stakeholders as South Africa’s overarching goal.”

No surprises in South African elections

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