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Sep 7, 2018 | 09:00 GMT

7 mins read

South Africa's Leader Hopes for a Payoff on His Gamble

South African President Cyril Ramaphosa attends the 10th BRICS summit on July 26 in Johannesburg.
(THEMBA HADEBE/AFP/Getty Images)
Highlights
  • With problems such as high unemployment, corruption, declining education standards, crumbling infrastructure and frequent strikes, South Africa's economy is unlikely to improve before elections in 2019.
  • Economic pressure will force President Cyril Ramaphosa to implement populist measures, such as land expropriation without compensation, to shore up support for the ruling African National Congress party ahead of the polls.
  • Despite the populist turn, South Africa will continue anti-corruption efforts at state-owned enterprises and other institutions, helping to clamp down on mismanagement and waste.

Editor's Note: This assessment is part of a series of analyses supporting Stratfor's upcoming 2018 Fourth-Quarter Forecast. These assessments are designed to provide more context and in-depth analysis on key developments in the coming quarter.

Since coming to power in early 2018, South African President Cyril Ramaphosa has gone to great lengths to distance himself from his controversial predecessor, Jacob Zuma. By cracking down on graft and making overtures to the business community and foreign investors, Ramaphosa's reign has offered a notable departure from the populist and corruption-tainted Zuma. Still, Ramaphosa has — much to his chagrin — continued the legacy of his predecessor on one front by failing to improve South Africa's lackluster economy.

The uninspiring economic situation would create a headache for any leader — particularly one whose country will hold crucial elections within the next year. The elections, which are expected between the first and second quarter of 2019, will heap additional pressure on Ramaphosa, who banked on a wave of "Ramaphoria" following his assumption of power and an accompanying uptick in foreign investment to improve the country's economy and bolster his ruling African National Congress (ANC) party. Such a lift, however, has not come, meaning Ramaphosa might have to play the populist card at the expense of hurting investor confidence if he is to head off the ANC's challengers and win next year's polls.

The Big Picture

South Africa is southern Africa's hegemon, continental powerhouse and home base for many of Africa's largest multinational corporations. Since coming to office in early 2018, President Cyril Ramaphosa has tried to boost foreign investment in the country, albeit without much success. As South Africa inches toward crucial elections in 2019, its lackluster economy will push Ramaphosa to alter his course.

Ramaphosa's Difficult Choice

South Africa's economy contracted by 0.7 percent in the second quarter, following a nearly 2.6 percent contraction in the first quarter of 2018, the National Statistics Office of South Africa reported on Sept. 4 — confirming that the country is in its first technical recession since 2009, when Zuma's South Africa also experienced a downturn in his first six months in office. The poor economic news is driven by many factors, such as generally bearish outlooks for emerging market economies, decreased agricultural output and reduced consumer spending. However, South Africa's many systemic deficiencies also weigh heavily on the economy, including extremely high unemployment, plummeting education standards, uncertainty over policy, expensive electricity and frequent labor action.

A chart depicting the South African rand's recent slide.

So far, Ramaphosa has attempted to strike a difficult balance between declaring South Africa "open for business" and the realities of being the leader of the ANC, which has many diverse constituencies, some of which are more focused on protecting workers' rights than attracting foreign investment to the country. Regardless of where Ramaphosa's proclivities lie, political pressure is likely to drive the president leftward as the prospects for economic improvement before next year's election are dim. As a result, Ramaphosa and his allies will likely adopt more populist rhetoric in the months to come in an effort to shore up electoral support for the ANC, thereby deterring investment.

The Specter of Land Expropriation

The question of land expropriation will loom large against such a backdrop. On July 31, the ANC officially proposed a constitutional amendment that could ultimately allow Pretoria to expropriate land without compensation. The issue has attracted controversy for years, but the ANC upped the stakes by adding the matter to its party platform at the beginning of 2018. The president initially opposed the ANC's plan but has embraced it in recent months, arguing that land expropriation is necessary to redress historical grievances following the end of apartheid in 1994. In a recent op-ed for the Financial Times, Ramaphosa also suggested expropriation was a must to improve South Africa's overall economic output, noting that just 7 percent of landowners control 97 percent of total agricultural holdings and that a total of 72 percent of overall agricultural land is owned by white South Africans.

Unsurprisingly, the land expropriation proposal is a lightning rod for investors, who fear that the confiscation of land without compensation could pave the way to more nationalization or expropriation in the years ahead. Indeed, the current proposal follows Pretoria's previous move to amend its mining charter to require companies to increase black ownership to 30 percent within five years. In the end, Ramaphosa has pursued greater black economic empowerment at the expense of companies that constitute the country's most profitable sector, reinforcing the image that South Africa prioritizes populism over competitiveness.

This has put Ramaphosa in a tough position. While he has argued that his administration will take a conservative approach to the land expropriation issue, he cannot promise that his successors will not take a more radical line, especially as the ANC's lock on power in future elections is far from guaranteed amid the rise of the far-left Economic Freedom Fighters party, for example. Nevertheless, Ramaphosa is likely to tolerate a pullout by some foreign investors — who are likely to reinvest in more secure assets elsewhere — in the interest of making political gains in the upcoming elections.

Ramaphosa is likely to tolerate a pullout by some foreign investors in the interest of making political gains in the upcoming elections.

Getting Tough on Graft

Away from the divisive land expropriation issue, however, the Ramaphosa administration is likely to maintain its efforts to weed out corruption in South Africa's institutions, including state-owned enterprises. Ramaphosa has named Pravin Gordhan, a former finance minister who has earned a reputation for being tough on corruption, as his public enterprises minister, tasking him with leading the ANC's anti-graft efforts. Gordhan has already opened investigations into "state capture" — the process in which corrupt interests literally "captured" the state under Zuma — and other issues connected to Ramaphosa's predecessor.

Broadly speaking, Ramaphosa, Gordhan and their allies seem to agree that South Africa's drift into corruption and mismanagement under Zuma fundamentally harmed the country's health and the prospects that the ANC will continue in power, especially amid the challenge posed by the Economic Freedom Fighters and the center-right Democratic Alliance. Ramaphosa has directed his energies at Eskom, the state electricity giant that provides 90 percent of the country's power and which was at the center of numerous Zuma-era corruption scandals. Eskom has presided over ballooning inefficiency and debt, leading to fears that it could drag down the country's credit rating. Accordingly, the extent of the administration's efforts to eliminate graft at the power utility will go a long way to determining the president's ultimate success on the anti-corruption front.

Despite his best efforts, Ramaphosa has yet to pull South Africa's sputtering economy out of its doldrums. Looking forward, his path is only going to become more difficult, as he appears to have little choice but to turn to populism to shore up electoral support, thereby hurting investment. Even so, he has given the green light to eliminate obstacles to long-term investment, such as corruption and mismanagement. Ultimately, with South Africa's 2019 election fast approaching, Ramaphosa will be forced to grapple with the immediate concern of securing victory for the ANC. And if that requires a left turn to appease the party base — negatively impacting short-term investment in the process — it's a tradeoff Ramaphosa is willing to take.

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