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Portfolio > Economy & Markets

South Africa’s Prospects Eroding

By Marlene Y. Satter

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Headwinds are buffeting South Africa.

The country that nearly tripled its GDP since the end of apartheid almost 20 years ago, from $136 billion to $385 billion, has seen that growth erode, thanks to various issues it has failed to resolve. Its position in the BRICS as a symbol of emerging market growth has been hit by a succession of blows, culminating in an October punctuated by bad news.

The International Monetary Fund started off the month by downgrading its growth forecast and warning that South Africa was heading for a crisis if it didn’t implement reforms, and quickly. Unemployment has not fallen since the country left apartheid behind; officially, the rate is 25%, but unofficially it’s more like 35%, when those who have abandoned the quest for work are factored in. Youth unemployment is around 50%, as it is in some Eurozone countries such as Spain.

If such high unemployment isn’t bad enough, the country is seeing upheavals in its labor market as workers resort to strikes in their quest for better pay and benefits. Mining has made the most headlines, as gold and platinum miners last year struck Lonmin and Anglo American Platinum, among others; violence erupted and several deaths resulted.

But miners were far from the only workers to try to better their condition; manufacturing, construction, automotive, and aviation sectors were also hit by walkouts and work stoppages, and even the public sector was not immune to labor unrest.

Seven different automakers, from BMW to Toyota, were hit by strikes, which, according to the National Association of Automobile Manufacturers of South Africa (NAAMSA), cost the industry at least 20 billion rand ($2 billion). BMW, after a four-week strike that shuttered its only plant in the country and caused it to miss supply targets on some export contracts, decided to stop a previously planned expansion in South Africa. Karl Cloete, deputy general secretary of the National Union of Metalworkers of South Africa, in a statement characterized BMW’s decision as “political and economic blackmail.”

Other foreign investors may follow BMW’s lead, and slow or eliminate altogether the money they put into the country. According to the Organization for Economic Cooperation and Development, in 2012 South Africa was the beneficiary of some $4.6 billion in direct foreign investment (DFI) and, according to the Reserve Bank, $5.5 billion in portfolio inflows from outside the country. However, as foreign investors see South Africa’s problems as greater risks, that could change.

The country has already suffered because of its failure to address such issues. After the violent mining strikes in August of 2012, the Big Three ratings agencies downgraded South Africa’s debt. It was the first time since 1994 that the country’s rating had suffered.

Additional troubles are on the way as well that could further weaken the South African economy. A combination of a weak rand—it’s fallen 15% against the dollar this year—and higher wages drove inflation up to 6.4% in August; it was the second month in a row that inflation came in higher than the central bank’s target of between 3 and 6%.

The month ended much as it began, with the Reserve Bank warning that the slowing economy, together with workers’ strikes, could mean the country would see its sovereign credit rating downgraded, which would make foreign investors much less interested in funneling their money its way. Fitch Ratings has already warned of a potential downgrade if South Africa fails to achieve faster growth and cut spending.

Foreign direct investment made up 1.2% of the country’s GDP in 2012, and foreign investors hold approximately 37% of the country’s sovereign debt.

Another potential hazard faced by the South African economy is the possibility that a downgrade would bring it closer to the cutoff for Citibank’s World Government Bond index. The country joined just last year as a means of boosting foreign inflows. However, a downgrade could kick it back off again, and also leave it exposed to higher borrowing costs, in addition to weakening its banks’ credit ratings.

While the government does have the National Development Plan, a 20-year economic growth strategy, union leaders have denounced it as being based on cutting worker pay and benefits. Labor unrest may not be on its way out just yet. In addition to creating new jobs, the plan is also supposed to help the country improve its infrastructure, become more competitive, increase the level of education, and tackle the problem of poverty. But in the teeth of these lofty goals, Finance Minister Pravin Gordhan recently revised the country’s economic growth projection for the year down to 2.1% from the 3% that was projected a year ago.

Investors will want to keep an eye on any additional setbacks and watch closely for signs of progress.

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