Regional giants: South Africa’s economic crisis

By Camille Capelle

Historically, there has been an expectation in the post-apartheid era that South Africa would ascend into the role of regional leader on the continent. However, even in the new democratic era, persistent economic instability and the inertia of the political establishment has meant that this potential has never been realised.  

Recent power outages and criticism of President Cyril Ramaphosa’s lack of decisive action have brought South Africa’s dire economic situation back into the news. Although far from being the only issue, the increasing power outages are the most publicly visible symptom of  declining economic conditions.

President Ramaphosa, who succeeded Jacob Zuma in February 2018, made bold promises for economic recovery and job creation. So far, he has been unable to deliver. His preoccupation with the political and bureaucratic process over the need to implement immediate efforts to address these issues is one of the main causes for this. Citing the importance of consensus as well as issues of internal corruption as his excuse, Ramaphosa is quickly losing credibility and the confidence of the people as South Africa’s financial situation continues to worsen. 

The alarming possibility that South Africa may receive a third ‘junk’ credit rating, is an indicator of the urgency with which the South African government must act. South Africa’s population growth and inability to sustain economic growth, has caused staggering unemployment rates, reaching 29.1% in 2019. Tax revenue is not meeting expected estimates, as debt is expected to reach 70% of GDP in the next three years. While growth repeatedly fails to meet projections, the World Bank is losing confidence in short-term economic recovery. 

Image source: Waldo Swiegers/ Bloomberg

This is not a new challenge that South Africa is facing. General economic underperformance is a remnant of the global financial crisis of 2008, from which South Africa has not recovered. Mismanagement of public finances and the South African Revenue Service have had lasting negative implications for economic recovery. 

Economic prospects are exacerbated by continuing policy uncertainty. Internal divisions within the African National Congress (ANC) are the main reason for the inaction of the government in addressing these economic issues. Left-wing opposition to Growth, Employment and Redistribution (GEAR) strategy to reduce debt levels is one such example. Internal divisions within the ANC are part of a wider delicate balancing act of the interests of the private sector and those of union groups. Action based on consensus therefore becomes an impossible task, made even more critical by the severity of economic deterioration. Critics say that there is no more time for the negotiation of unanimous solutions and instead, are calling for decisive action by the president. 

One of the large issues for the South African economy is the energy sector and the financially unsustainable company Eskom. Surviving on government bailouts, the state power utility company has amassed a debt of 450 billion rand ($31.4 billion). Providing 95% of the country’s electricity, Eskom Holdings is a drain on public finances as the government tries to keep the key resource afloat, even though it simply doesn’t have the capital to do so. Other industries such as mining and manufacturing are also suffering from the country’s economic weaknesses. 

With real GDP growth at 0.7% in 2019, hope for the future is dependent on the South African government’s ability to push for change in a delicate political environment. Efforts have been made with tax relief measures and Minister of Finance Tito Mboweni’s growth plan, but they are met with scepticism as South Africans wait for promises of reform to translate into concrete change. 

Cover image source: REUTERS/Siphiwe Sibeko/File Photo

The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.

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