February – March 2008 at a Glance

Polokwane Fallout Continues

Jacob Zuma, the new ANC President, has had to practise a lot of political tap dancing since his elevation to the ANC presidency in December. It seems as though every time he opens his mouth, he evokes someone’s displeasure. And the press follows his every move. When he tries to mollify business by endorsing the budget and the continuity of current macro-economic policy, labour takes him to task – and vice versa. The new leadership within the ANC is clearly exercising its influence, making more apparent the inherent divergence of interests among the tripartite alliance and clearly sidelining the “exiles”, who have dominated the ANC since 1994.

Meanwhile, Zuma and his legal defense team continue to deny any corruption on his part in the infamous arms deal and to try to prevent evidence from being presented in court.

But the shadow of the arms deal does not hang over Zuma alone. There have been allegations that President Thabo Mbeki also was involved in arms deals irregularities, along with other ministers. The opposition in parliament calls for a thorough investigation, while some ANC stalwarts suggest an amnesty of sorts to get rid of the problem.

At the same time, the ANC is determined to disband the Scorpions (a special prosecuting authority that operates separately from the South African Police Services (SAPS) and is considered by the vast majority of South Africans as much more effective). This naturally gives rise to suspicions that there really is something to hide since the Scorpions are investigating allegations about arms deal corruption and have brought charges against Zuma.

Although the opposition parties in parliament oppose the disbandment of the Scorpions, it appears the ANC majority will prevail and fold the Scorpion operations into the SAPS despite overwhelming public opinion in favour of maintaining the Scorpions.

The ANC leadership wants Kgalema Mothanthe, the new ANC Vice President, to be given a cabinet post to help prepare him for his eventual duties as Vice President of the country, or, in the event of Zuma’s conviction, President of South Africa. That is likely to transpire in the near future.

Economic Travails

Good news about the economy was difficult to come by during the first quarter of 2008. Inflation continues to rise, electricity shortages won’t go away for years, interest rates remain high and could go higher. Economic growth is projected to fall to 4% this year, probably impacting negatively on job creation. Wage settlements during the course of the year are likely to be inflationary. As the Governor of the Reserve Bank said in late March, South Africans need to tighten their belts.

There was some good news in the 2008-09 budget presented February 21. South Africa had achieved a 5.1% growth rate in 2007 and accumulated a 1% budget surplus. A late March report showed that 433,000 jobs were created during the twelve months to September 2007, lowering the unemployment rate to 23%. But that is about as far as the good news went. Year-on-year inflation was well outside the targeted range and projected to remain so.

Eskom power shedding began to bite, causing losses in mining and manufacturing. Higher interest rates were also beginning to bite, causing serious slowdowns in both the housing and automotive sectors.

In late March, Eskom, the state owned electricity supply company, requested a 53% hike in electricity prices over the next few years to cover the cost of new generating plants. The labour unions and elements of the ANC protested loudly but government has little choice but to approve the request. It can not afford to do anything that would impede the infrastructure improvement programmes and the preparations for the 2010 Fifa World Cup. Add increased electricity costs to the higher costs for food (grain prices increased 20% last year) and fuel (up 30%) and it is difficult to see how inflation can be brought back to the targeted 3-6 per cent range in the near term.

CPIX for February, year-on-year, reached 9.4%, the highest in five years. Headline inflation rose to 9.8%. The Produce Price Index for February, y-o-y, was 11.2%. Reserve Bank Governor Tito Mboweni insisted that the inflation outlook did not necessarily mean that interest rates would be raised when the monetary policy committee meets next month but he did not rule it out either.

Leading Indicators

Gold Price – $946 an ounce (March 27), after reaching $1,000 earlier in the month

Platinum Price – $1983 an ounce (March 27), after reaching $2200 earlier in the month

JSE All Share Index – R29, 693 (March 27), compared to R25, 135 on January 24

CPIX – 9.4% – February, y-o-y

CPI – 9.8% – February, y-o-y

PPI – 11.2% – February, y-o-y

Exchange Rate – R/US$ – 8.03; R/Euro – 12.65; R/Pound – 16.06 (March 27)

Unemployment – 23%

The year a head in South Africa 2007

Information on the year ahead in South Africa – For Business traveler

The fallout from the tumultuous ANC Congress in Polokwane in late 2007 – at which Jacob Zuma defeated Thabo Mbeki for the ANC presidency – seems to indicate that the 14-year rainbow nation honeymoon is finally over.

It is relatively easy to identify the events that are going to dominate the headlines in South Africa in 2008; but much more difficult to predict the outcomes and the fallout. One thing is certain: the year ahead will be a testing one.

It will test the political maturity and the economic ingenuity of the new democracy. The prospect makes some South Africans uneasy, but not fearful. They have weathered worse storms before. But there is an unsettling realization that the country may be a very different place by the time 2009 rolls around.

Certainly it will have a new President waiting in the wings. Important Cabinet changes will be in the offing, if only to reward key members of the winning faction. The ANC will still be the ruling party, but an ANC drastically changed from within and under the control of a faction that rejects both the style and some of the substance of former ANC president, Thabo Mbeki…

Power struggle two

A power struggle of a different kind will play out in the year ahead, and for many years to come. Eskom, the country’s sole generator of electricity, started 2008 by confessing that there would be a chronic shortage of power for the next eight years, at least. It begged government to turn away any new project making large demands on power resources. And then it proceeded to introduce daily power-cuts across the nation, wreaking havoc on roads, causing factories, farms and businesses to lose millions, and domestic users to lose their equilibrium.

The timing could not have been worse.

South Africa’s prosperity hinges on attracting international capital to grow the economy. Power cuts scare investors. On top of that, the Soccer World Cup looms closer, and massive infrastructural development must be completed before then. Furthermore, the blackouts came just as the sub-prime crisis rocked bourses around the world. The cumulative effect is powerful.

From Cabinet down, emergency measures are being hatched. Some form of rationing will be imposed. South Africans have a reputation for ‘making a plan’, and patchwork solutions will almost certainly modify the crisis. But it is all devilishly inconvenient

South Africa Budget – June 2007

The Battle for Succession Continues

The month of June saw the rise of two political crises in South Africa… and their apparent dispersal. “Apparent”, because the rumbling clashes between the African National Congress leadership and its leftwing have not yet been resolved and are bound to continue for at least six months.

The first crisis, described in our May report, came when the Council of SA Trade Unions (Cosatu) demanded a 12% wage increase for all public service workers, and then organised mass protests when Government responded with an offer of six-and-a-half percent. Settlement came in at a predictable seven-and-a-half percent – but only late in June, and after several weeks of emotive dispute with some some grandstanding. It led to a number of violent incidents involving illegal strikers among teachers and nurses, and to threats by union leaders of additional illegal strikes by police and emergency service union members. Senior ANC officials criticised Cosatu’s secretary-general for his demagoguery during the Public Service strikes. Some see mass militancy as an ominous card that might be used in future power plays.

National Policy Debate

The second crisis loomed when the national political power struggle over presidential succession was taken to the ANC’s mid-year policy conference. President Mbeki warned the Communist Party – strongly represented among the delegates and within the Cabinet itself – not to interfere with ANC policy. The Communist Party, in turn, is threatening to suspend any of its Ministers in the ANC Cabinet, or any communist MPs who implement government policy if it conflicts with its own. In this atmosphere, President Mbeki, as president of the ANC, offered himself as president of the ANC for a third term. (He is due to step down as President of South Africa in 2009). The Communist Party and Cosatu, who have shown signs previously of backing deputy ANC president Jacob Zuma for both posts, will publicly oppose Pres. Mbeki’s extended leadership of the ANC. Nominations for leader of the party open in September and the issue of succession will come to a head at an ANC national conference in six months time.

Power Shift Proposed

Meanwhile numbers of proposals have been adopted at this mid-year session for formal approval at the same December conference. The most significant was a unanimous resolution that aims to centralise political power at ANC headquarters – not in the President in parliament – and to strengthen the post of ANC Secretary-General. The two junior members of the government Alliance hail this move, and other actions at the mid-year conference, as “a shift to the Left”. But a majority of delegates saw it as a move away from presidential power to a wider more democratic system within the ruling party. However, some of the ANC conference’s proposals for socio-economic State intervention in the name of NDR (political-speak for ‘National Democratic Revolution’) and for centralization of police authority, may prove decidedly anti-democratic. The nation awaits the more measured and decisive national ANC meeting in December.

Economic Trends

Capital spending soared nearly 22 percent this year, according to the Reserve Bank’s quarterly bulletin released late in June. The surge pushed capital formation as a ratio of GDP above 20% for the first time in 18 years – well above the annual average of 16% during the decade 1995-2005. This trend is expected to increase productivity and thus help stem inflation (which was also held in check by the Government’s refusal to meet a demand for 12% wage and salary increases.) The bulletin states that the surge in capital formation suggests “attractive returns on fixed investment” during a period when production capacity is strained. It noted that growth in the construction industry was exceptionally strong this year, and that growth was driven mainly by the public sector investing in national infrastructure, including energy and transport. Growth in consumer spending was broad-based, with spending on most categories of goods remaining robust. Private Enterprise confidence barometre remained high.

The forecast by Nedbank in June was that Economic growth should ease further during the remainder of this year. Domestic spending should ease as growth in consumer spending moderates in response to rising inflation, higher interest rates and elevated debt burdens. Spending on roads, rail, harbours, and on major items such as sports stadiums for the Football World Cup in 2010 will continue apace.