Country Profile — South Africa

After riding a wave of optimism in the 1990s, South Africa is facing a string of very real challenges in 2019. Nonetheless, the country remains key to the long-term success and development of the rest of the continent. Martin Clark reports.

Africa’s most developed economy has not had the easiest of times since Nelson Mandela first swept to power in the early 1990s. Amid high hopes and expectations, South Africa has faced large-scale unemployment and poverty, inbuilt inequalities, corruption scandals, plus a plethora of other economic and political challenges.

That, despite its abundant natural resources, from gold and diamonds to coal — and of course its magnificent wildlife and vibrant, youthful people. Yet, fast-forward a quarter of a century and the outlook for its 50 million citizens remains just as challenging.

What’s more, 2019 is an election year in South Africa, intensifying the glare for serving President Cyril Ramaphosa, a former union boss turned business tycoon. Unfortunately, economic growth has been largely anaemic in recent times, though experts believe the momentum may be picking up.

According to ratings agency Moody’s, the Government’s 2019 budget shows “further erosion in fiscal strength” though it notes an uptick in potential gross domestic product (GDP) growth. It projects that real GDP growth will reach 1.3% this year from an estimated 0.5% in 2018, well below levels seen in the first half of the decade.

For a country that has historically exerted great pull over the rest of the region, that’s some way behind the rest of sub-Saharan Africa, a continent that, at last, appears to be attracting the attention of foreign investors.

Average growth for the region is estimated at 3.5% in 2019, Moody’s says. By way of comparison, sub-Saharan Africa’s other largest economy, Nigeria, is forecast to grow at about 2.3%.

Infrastructure challenge

One of South Africa’s greatest assets when Mandela assumed power 25 years ago was its first-world infrastructure, from energy services to transport, assets like Durban, Africa’s busiest port.

But some of these facilities are now showing signs of age.

A big test facing the president is what to do with the country’s heavily indebted state power utility Eskom to halt a decline in its once-proud energy sector.

Once a flagship public enterprise, Eskom’s success of past decades — when it ratcheted up installed capacity tenfold, from around 4000MW to 40,000MW, from 1960 to 1990, making it one of the world’s top generating firms — seems long ago.

Despite other important and politically-led initiatives in the Mandela era, like stepping up electrification efforts to bring electricity to the nation’s poor, underinvestment in new capacity resulted in power shortages by the early part of this century.

Since then, Eskom has been playing catch up, building huge new coal-fired power plants to fill the gap, but at a massive cost that has placed it in a perilous financial position — the utility now struggles under a US$30 billion debt.

Corruption scandals, mismanagement and ratings downgrades have further eroded confidence, with load shedding now a day-to-day reality for many South Africans. While Finance Minister Tito Mboweni announced US$5 billion worth of state support over three years in his maiden budget this February, he stopped short of offering to take on the ailing firm’s full debt.

Though the bailout puts an additional and unwelcome strain on the public purse, it is deemed necessary to avert a total collapse of the power utility. Moves are also underway to unbundle Eskom into separate entities focusing on generation, transmission and distribution, to create a more stable operating platform going forward.

Financial sector

The Eskom problem — and the gigantic cost involved — underscores one of many urgent issues facing South Africa’s Government, whoever takes office after May’s elections.

While Ramaphosa has stated that the utility is simply “too big to fail”, the crisis is pushing up state spending, potentially influencing ratings activity and the sentiment of investors.

“The continued medium-term upward trajectory in government debt in the face of persistent broader spending pressures remains a source of downward pressure on South Africa’s ratings,” according to Fitch Ratings. Worryingly, taking on more debt could push the country’s credit ratings further into junk.

There are more encouraging moves, though, with progress in reducing public sector headcount and further measures to reduce the state payroll through early retirement schemes. Last year, Moody’s also revised its outlook on South Africa’s banking system to “stable” from “negative”.

It reflected the expected resilience of the banks’ creditworthiness over the coming year and a half, despite tough operating conditions.

“Although slow economic growth will hold back South African banks’ new business and revenues, we expect their credit risk profiles and problem loans to remain broadly stable through to the end of 2019,” noted Nondas Nicolaides, Moody’s Vice President, Senior Credit Officer.

Like Eskom, South Africa’s banks — concentrated in Johannesburg, the nation’s business hub — have been pioneers in Africa, raising standards, facilitating trade and also leading projects across much of the rest of the continent.

Trade and investment

There are strong historical links between South Africa’s financial system and the UK, which reflects a much broader commercial partnership.

Annual trade between the two countries is worth around £9 billion, and could be set to grow further, after Prime Minister Theresa May visited Cape Town in 2018 to bolster business ties.

UK exports of goods and services are estimated to have increased by around 25% in the past decade, comprising a wide range of items from printed books and materials, vehicles, parts and accessories, through to machinery and manufactured equipment.

But the potential across all sectors is immense. Innovative Essex-based firm, BioSure, which manufactures home testing HIV kits, is set to play a key role in addressing one of South Africa’s other big healthcare challenges — HIV/AIDS.

It completed its first international order last year, seeing its products sold in over 500 pharmacies across South Africa. Demand for its products in the region has grown month on month ever since. Combined with other markets, it means exports now make up 40% of the firm’s sales.

“Exporting our kits was always part of our business plan — a goal we achieved last year with our first contract in South Africa where the virus is most prevalent,” said founder Brigette Bard.

And exports are rising in the other direction too: goods exports alone from South Africa to the UK (excluding services) in 2014 were R37.6 billion (US$2.7 billion) and increased to R46.3 billion (US$3.3 billion) in 2017. Key South African exports include wine and food products — the UK takes over 20% of its wine exports and 30% of its fruit exports globally — precious metals and gemstones, and vehicles and accessories, among many others.

South Africa is also the largest recipient of UK foreign direct investment in Africa, accounting for 30% of the total in 2014, worth around £13.1 billion. More is on its way. In 2018, BP’s southern Africa business unit announced that it would invest US$1 billion in South Africa over the next few years. It includes an upgrade to its SAPREF refinery in Durban to produce lower sulphur diesel, as well as an upgrade to its fuel retail network.

Long-term potential

While trade and investment are showing healthy signs of growth, South Africa’s current political and financial challenges should certainly not be underestimated.

Nor, however, should they mask its undoubted long-term potential.

This, after all, is the home of the Big Five where lion, leopard, rhinoceros, elephant and Cape buffalo get to roam free in the famed Kruger Park and other game reserves.

A vast country with a dramatic and diverse landscape, from the Kalahari and Karoo deserts to the Drakensberg mountains, South Africa has long been a popular long-haul travel option, attracting thousands of visitors each and every year from the UK and elsewhere.

Other highlights include Cape Town and its iconic Table Top Mountain, the famous wine route of the Stellenbosch area in the Western Cape and the luxurious Blue Train route.

There is history in abundance too: from Robben Island, Mandela’s home during two decades of incarceration, to Rouke’s Drift in KwaZulu-Natal province, the site of an epic battle between British troops and brave Zulu warriors.

Then there are the enormous mineral deposits and other natural resources scattered throughout the country, an industry that continues to yield surprises after more than a century of extraction.

That includes a massive natural gas field discovery in February by Total, with its Brulpadda well offshore, which could hold 1 billion barrels of oil equivalent in gas and condensate reserves.

The world-class gas discovery shows that, against a climate of widespread poverty, diminishing public finances and many other pressures, South Africa is a country full of surprises.

There remains a belief and an optimism that there is more to come, as the country plays an integral future role, just as it has done historically, in helping to shape and stabilise the rest of the southern Africa region.