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Local political challenges are threatening South Africa’s overall economic outlook, says economist Sanisha Packirisamy and head of investment research Herman van Papendorp from Momentum Investments.
The risk of slower economic reforms and unstable monetary policy outcomes has risen alongside uncertainty over President Cyril Ramaphosa’s standing as president.
In Momentum’s latest market and economic outlook for January 2023, the economists said that recent negative political development raising uncertainty over the country’s leadership poses significant downside risks to growth expectations.
According to the group, against the backdrop of dimmer global growth, a slow grind lower in elevated inflation and geopolitically, a more fragmented world, growth in South Africa is set to moderate from an expected 2.5% in 2022 to 1.1%.
Ramaphosa’s leadership had been in question since June last year when the former head of South Africa’s national spy agency, Arthur Fraser, laid charges against Ramaphosa over failing to report a robbery on his presidential game farm properly.
On 19 December, the African National Conference (ANC) announced at its latest elective conference that Ramaphosa was secured in a second term, easing shaky markets and strengthening the rand.
Despite Ramaphosa and many of his allies securing top positions in the ANC, Momentum said that questions remain about succession and the potential unwinding of progress in critical areas, such as the fight against corruption and the reinstatement of South Africa as a credible base for financial institutions.
Going into 2023, political stability will be needed to facilitate economic stability, Momentum said. As seen with Ramaphosa’s recent scandal, political scrambling can cause major insecurity in local markets and ward off foreign investment.
Busi Mavuso, the CEO of Business Leadership South Africa (BLSA), when reacting to the market shake-up caused by Ramaphosa in December, said that in future, all stakeholders should be made comfortable that government institutions and civil society will remain robust and capable.
“We should have confidence that the party and the state really are separate, that the institutions of government are not suddenly at risk because of who has political power.”
“Should there be a change in political leadership, we should be comfortable that there will be a well-managed transition,” added the CEO.
The general political climate of South Africa is still seen as a major obstacle to investment in South Africa, according to the Bureau for Economic Research (BER).
The BER showed that 83% of manufacturers in the country still cite the general political climate as an obstacle to domestic investment.
“This is expected to climb further on the back of recent unfavourable local political developments.”
“Around 65% rate insufficient demand as a constraint and is a rising share agree that short-term interest rates are hindering investment prospects.”
Constrained
Businesses are to remain constrained due to political uncertainty, a staggered pace of economic reforms, and softer-than-expected demand, Momentum said.
With lower growth expectations in some of South Africa’s main trading partners, the private sector’s demand and investment would be the main contributors to growth.
Although demand needs would be directed inwards, structural challenges and mounting headwinds will continue to dampen local demand, noted the economists.
Meanwhile, the pace of increases in nominal wages and social grants has failed to keep up with the latest surge in inflation, while employment prospects are weakening, given continued downgrades to this year’s expected growth outcome, Momentum said.
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