ANC Infighting Hurts Investor Confidence in SA Economy

ANC Infighting Hurts Investor Confidence in SA Economy

By GABRIEL MORAN | October 16, 2017

In its annual global report, BMI, the research arm of Fitch credit-rating agency, recently announced that political instability in South Africa would further impede the economic growth of the country.

The report warned that investor confidence would be diminished by “radical rhetoric and policy positions by the traditionalist wing of the party (African National Congress).” BMI asserts that “mining and manufacturing activity are likely to be hit especially hard by the political challenges, as the elevated policy uncertainty stymies much-needed investment.”

South Africa has long been held as one of the continent’s most robust economies. Unlike other African countries, South Africa’s affordability, abundant capital, financial market sophistication, optimal business tax rates, and developed infrastructure make it attractive to international business and investment. In 2014, the leading contributor to the South African GDP was the finance, real estate, and business services sector, with a share of 18.4%. Other key sectors are government services (15.2%), wholesale, retail, motor trade and accommodation (13.3%), manufacturing (11.9%), transport, storage and communication (9%), and mining and quarrying (7.5%). In 2011, South Africa joined Brazil, Russia, India, and China as part of the informal BRICS coalition of emerging-market economies.

In recent years, the remarkable growth of the South African economy following the end of apartheid has been overshadowed by successive periods of contraction since the global financial crisis in 2009. Since 2011, the GDP of South Africa has decreased by $121.6 billion. The country is currently in the midst of a recession that began between the last quarter of 2016 and the first quarter of 2017. The average economic expansion for South Africa is forecast to be around 1 percent for the next three years.

In the eyes of the international business community and the people of South Africa, uncertainty due to a corrupt and chaotic African National Congress has been the primary cause of economic stagnation.

The African National Congress (ANC), South Africa's governing party, has been in power since the transition to democracy in April 1994. Nelson Mandela, the renowned social activist, philanthropist, and politician won the Presidency in South Africa as the leader of the ANC. The ANC has long been held in high esteem in South Africa for its support of the voting rights of black Africans and its association with Nelson Mandela. However, in the last ten years the party has been rocked by continued corruption and scandal.  

The President of South Africa, Jacob Zuma, has been at the center of bribery, embezzlement, and sexual assault claims. Most notably, Zuma is charged with money laundering and racketeering from a $5 billion Strategic Defense Package arms deal in 1999. Elected in 2009, he has already racked up several hundreds of charges from numerous South African criminal courts. In 2016, a court ordered for President Zuma to be charged with 783 counts of corruption. In the same year, another court ruled that President Zuma had breached his oath of office by using government money to renovate his private home in Nklanda. Allegations that President profited from a relationship with a wealthy Indian family will also be investigation this year.

The President’s scandal-ridden tenure in South Africa’s highest office has caused division with the ANC. While the leadership of the ANC is packed with allies of President Zuma, the rest of the party has been struck by factionalization. Furthermore, as the Presidential election looms in 2019, the ANC is facing the difficult prospect of finding the next leader of the party. President Zuma and his allies are backing his ex-wife, Nkosazana Dlamini-Zuma, to become ANC President. While supported by the ANC’s women’s league and parts of the youth wing, some members of the party consider her to be an extension of President Zuma’s influence on the politics of the party. Thus, many are supporting 64-year-old businessman Cyril Ramaphosa, who has backing from key South African labor unions and numerous communist organizations. In an interview with Bloomberg Politics, ANC’s Eastern Cape chairman Phumulo Masualle stated “We need unity in the movement. This tearing each other apart has got to stop.”

The political instability created by the ANC has been enough to dissuade the international business community from engaging in long-term investments. In the World Economic Forum’s annual competitiveness report for the 2017-2018, South Africa dropped 14 places down to 61. The country’s institutional environment was ranked 76th, considerably lower than last year's ranking. Bernard Agulhas, CEO of the Independent Regulatory Board for Auditors, recently said “Confidence in financial markets is dependent on perceptions of how safe it is to do business in a country, and such perceptions are influenced by levels of corruption, crime, downgrades and strength of financial institutions.”

The report from BMI comes several months after Fitch and S&P Global Ratings both downgraded South Africa’s foreign-currency rating to speculative grade, or junk, following the President Zuma’s unexpected firing of Finance Minister Pravin Gordhan. “The deterioration in sovereign creditworthiness brings increased risks to the banking sector. Higher borrowing costs for the sovereign will translate into further pressure on economic growth,” said Fitch in a statement.

Calls for President Zuma to step down are sonorous among politicians and the people of South Africa. On September 27th, thousands of South Africans crowded the streets of the capital, Johannesburg, to protest corruption in the South African government. The protests, led by the Congress of South African Trade Unions (COSATU), were filled with many unemployed South Africans waving red placards that read “Zuma Must Go.” The repercussions of partisan squabbling are not limited to the realm of the domestic affairs. As the South African economy suffers a severe depression and rising unemployment levels, currently at 26.6%, the country cannot afford for foreign investments to dry up.

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