ISS: Of downgrades and divisions: which way out for South Africa?

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The months ahead will determine the future of the South African democracy project. If the country is downgraded to sub-investment grade status, it will extend the impact of the electricity crisis and lock the country into a low-growth pathway.

Without growth – rising campus violence, demands for redistribution, and the unravelling of the political pact negotiated from 1991 to 1994 could destabilise the country with a long-term impact upon its future. A possible decision by the rating agencies that South Africa is at sub-investment status is not a once-off blip. Typically it takes around seven years to recover from such a classification; a time period that would take the country well into the first term of a successor to Jacob Zuma – most likely to be current Deputy President Cyril Ramaphosa.

The financial crisis unleashed by the ‘redeployment’ of former finance minister Nhlanhla Nene in favour of Des van Rooyen, and the panicked appointment of Pravin Gordhan (events now known as 9/12) has brought forward, by two years, an expected tipping point in South Africa’s future.

Earlier forecasts by the Institute for Security Studies (ISS) looked at the leadership vacuum and internal battles within the African National Congress (ANC), and highlighted the period from December 2017 (when a new ANC president is to be appointed) to mid-2019 (when s/he takes over from incumbent Jacob Zuma in the next national election) as potentially hugely disruptive and unsettling. The now-imminent downgrade will be no less decisive.

A previous ISS Today noted that the golden legacy of former president Nelson Mandela is slipping away. For many years, the 2007/8 global financial crisis and then the slump in international demand for commodities were blamed for lacklustre growth.

In 2013, the ISS released a series of papers that examined prospects for South Africa’s long-term future, including forecasts on the National Development Plan (NDP). In February 2014, shortly before the national elections, the ISS outlined four broad scenarios for South Africa to 2030. We plotted two positive or high-road scenarios, titled ‘The future is ANC,’ and ‘The rise of multiparty democracy,’ which we argued could unlock sustained high-growth rates – which we called Mandela Magic growth. Both storylines were premised on the implementation of the NDP, but each within a very different political context.

We named the more likely future pathway for South Africa ‘Bafana Bafana’ – after its perennially underperforming national soccer team – but still envisioned an average growth rate slightly higher than the 3.2% that it has achieved over the last 70 years. This is because the long-term, structural drivers of growth remain quite healthy.

Our final scenario, which we dubbed ‘Nation Divided,’ was one where the ANC fully succumbs to patronage and adopts populist politics to stave off a threat from the left. Eventually poverty would increase, jobs would be few and far between and the economy, by 2030, would be some 33% smaller than it could have become under the Mandela Magic forecast.

The May 2014 elections confirmed the steady attrition of support for the ANC, but also the tenacity of its remarkable legacy. The elections also revealed clear improvements in the support base of the Democratic Alliance, and the surprise of the Economic Freedom Fighters.

Hopes for a different growth path were dashed soon after the election with the appointment of a bloated cabinet. Existing departments were divided into smaller components in the interests of political expediency, and subsequent legislation revealed an inability (or unwillingness) to implement the NDP. Poor planning and lack of implementation mean that South Africa cannot grow until additional electricity supply from Medupi, Kusile and other projects comes on line.

We were forced to rethink our forecasts. In August 2015, we released an updated set of scenarios (now called Mandela Magic Light, Bafana Bafana Redux and still Nation Divided). These lowered the growth forecasts for all, and acknowledged that despite its positive structural attributes, South Africa’s expected trajectory was likely somewhere between Bafana Bafana Redux and Nation Divided.

We warned that the scene is set for ongoing policy uncertainty and possible social turbulence as South Africa heads to a next round of general elections in 2019. This poll will most likely see further reductions in electoral support for the ruling party and increased gains for opposition parties – unless the ANC is able to pull a very large rabbit out of the hat. This, we argued, would only be possible with a comprehensive leadership transition in 2017, well ahead of the 2019 elections.

That future is now here. A negative decision by the rating agencies will increase borrowing costs and crowd out the ability to invest in infrastructure, education and health as well as expenditure on social grants, a national health scheme and ability to institute a minimum wage. Like the electricity constraint, a ratings downgrade effectively caps growth.

Rather than led by Jacob Zuma or the top echelon of the ANC, it is a ‘new Team South Africa’ that returned this week from an exhaustive (and exhausting) trip to Europe and North America.

Led by Finance Minister Pravin Gordhan, it included the likes of Colin Coleman (from Goldman Sachs), Cas Coovadia (from the SA Banking Association), Christo Wiese (of Shoprite fame) and Tyotyo James (from COSATU – the Congress of South African Trade Unions, although he was not able to join for the entire trip), who are advocating for the urgent implementation of a set of practical proposals to stave off a downgrade.
‘New Team South Africa’ has identified a set of changes in policy (and a commitment to implementation) that has to take place in the weeks ahead. These range from the requirement for a reasonable minimum wage (by implication significantly below that advocated by COSATU), stabilising the management of parastatals (including a minimum private-sector quota on all boards), stability in visa regulations and other self-evident measures.

Almost without exception, each of these will be met with significant challenges from various factions within the ruling party and the broader public, including elements within the business community.

South Africa is trapped. It can rise to the challenge and set a new path for the future, or can stay the course and become a ‘Nation Divided’. Settling on the first steps towards that new course will require all South Africans to unite behind the package of proposals advanced by Gordhan and associates, and for serious introspection on leadership, ethics and policy within the ANC.

Ironically the ratings agencies may enable government to do things that it may not otherwise have been able to, such as partial privatisation of South African Airways. But none of this is possible with a president prepared to see the entire governance edifice collapse in order to protect himself. Today, only the early departure of Zuma has the potential to stave a downgrade. Politics have fully trumped economics.

Written by Jakkie Cilliers, Head, African Futures and Innovation Section, ISS



Republished with permission from ISS Africa. The original article can be found here.