Key political risks to watch in South Africa

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Chronic unemployment, broken schools and rampant corruption translate into bleak prospects for South Africa, with two major rating agencies downgrading their outlooks for Africa’s largest economy.

President Jacob Zuma had pledged to tackle the problems but after more than two years in office and with little to show for his efforts, many see him as an ineffectual leader unable to halt the erosion of his country’s international competitiveness.

His government wants to take greater control of the economy, a worrying move since almost all the state-owned enterprises are riddled with debt and have been crippled at various points by mismanagement, Reuters reports.

Zuma, facing re-election as leader of the ruling African National Congress at the end of the year, wants to keep his powerful labour allies happy, and will make sure pro-business reforms that economists say are desperately needed, are kept on ice.

The administration is also clamping down on criticism, finalising legislation to jail whistleblowers and reporters who reveal what the government sees as state secrets.

Meanwhile, a persistent energy crunch is raising worries about rolling blackouts like those that hit the economy in 2008.

DOWNGRADES

Fitch, last month, and Moody’s a few months ago downgraded the outlook for South Africa, saying Zuma’s government has not done enough to tackle structural problems or cut into growing state debt.

The move had little impact on bonds but underscored the concerns of investors that not enough was being done for industrial development and employment.

The ANC will have a major policy meeting in June but expectations of any meaningful changes are low.

The ANC has devised numerous high-minded plans to improve schools, create jobs and end poverty since it came to power with the end of apartheid in 1994 but most of them have been crippled by corruption and incompetence on the ground.

The country is on track for years of low growth, far below the 7 percent a year the Treasury says is needed to make a significant dent in unemployment.

One promising sign is that the central government has taken control of failed departments in a few provinces to restore health and education systems that had ground to a virtual halt due to gross local mismanagement.

But there have also been hundreds of anti-government protests across the country by people still waiting for basic services such as electricity, running water and schools. These have rocked the ANC and undercut its promise to provide “a better life for all.”

What to watch:
– Zuma’s policy agenda for the year and whether he lays out serious measures to increase accountability.
– Growing protests about service delivery, which will be seen as a rebuke to Zuma’s administration.

LEADERSHIP FIGHT

Zuma appears to have sidelined his main rival, ANC Youth League President Julius Malema, who faces expulsion from the party for five years for violating its rules.

Zuma’s path to re-election as ANC leader would have faced a serious obstacle if Malema, once considered a party kingmaker, had remained in the movement.

If Zuma wins he is almost certain to be the party’s nominee for the 2014 presidential election, and the ANC’s stranglehold on politics means its candidate is virtually guaranteed to win the race.

Malema had become one of Zuma’s most prominent critics, voicing the concerns of party factions frustrated with what they see as a lack of vision.

Zuma’s foes in the ANC remain and may still try to oust him by finding dirt that could damage his presidency. Zuma has faced corruption charges but has never been convicted.

What to watch:
– An ANC reversal of policy that allows Malema to stay, which would be a major blow to Zuma.
– Corruption allegations that undermine the president.

EXPENSIVE LABOUR

ANC governments have poured billions of dollars into job training programmes but much of it has been lost to corruption or incompetence. The programmes have strained the budget and raised concerns over a yawning deficit.

The country has lost about a million jobs in the past two years, with the manufacturing sector the hardest hit. Many of these jobs will not come back because labour has priced itself out of the market.

The average factory worker in South Africa earns about six times as much as a factory worker in China and is less productive. Industries which were once internationally competitive, like footwear, have faded.

South Africa adopted rigid labour laws mainly because of the governing alliance between the ANC and the major union federation COSATU, a pact formed in the anti-apartheid struggle which continued when the ANC came to power.

The ANC has sent to parliament four major measures aimed at appeasing COSATU that will be at the heart of the legislative agenda this year. The bills place more burdens on employers, make it more difficult for them to hire seasonal labour and drive up the cost of staff.

What to watch:
– Zuma proposing a raft of costly employment programmes that further strain the budget.
– Parliament trying to push through labour legislation to bolster Zuma’s standing with COSATU.

ELECTRICITY

The near-collapse of the grid in a system overload in 2008 forced mines and smelters to shut for days and deterred new mining and manufacturing investment. Electricity supply shortages still worry businesses and households.

State utility Eskom said it has secured enough cash to build new power stations, and the first new unit will come on stream later this year. Eskom’s capacity margin will remain thin until a massive new power plant comes on stream. This is due next year but may be postponed because of construction delays.

The country – the world’s biggest aluminium producer – will not have fully adequate power supplies until 2015.

Large tariff increases over the next three years have helped Eskom plug its funding gap, but industry leaders complain that the extra costs are likely to stifle growth.



What to watch:
– Additional tariff rises to pay for power stations that could fuel inflation.
– Blackouts caused by system overload may undermine Eskom’s assertions there will be no repeat of 2008, deterring long-term direct investment.