South Africa has struggled to inspire confidence in its economy for more than a decade. Now, as the country works to pull itself out of a downturn worsened by the Covid-19 pandemic, the past week’s indiscriminate vandalism and looting is likely to set it back even further.
The pillaging will deal a blow to business confidence and signal further uncertainty for investors, analysts warned. The government will have to double down on its social and structural reforms to try to get back on the path to recovery.
On Monday, the rand tumbled as much as 2% against the dollar as the violence knocked sentiment, and economists warned that, if left unchecked, it could severely compromise South Africa’s recovery.
By then, the looting and burning — initially sparked by supporters of Jacob Zuma, angered by the former president’s arrest last week — had already taken a toll. Over the weekend trucks were set alight in KwaZulu-Natal, Zuma’s home province. On Monday people were filmed ransacking major retailers in eShowe and kwaMashu. The riots and looting spread to parts of Gauteng.
Pharmaceutical chains, banks and retailers had to shut down.
On the precipice
“The looting and mindless destruction of property is alarming,” Business Leadership South Africa chief executive Busi Mavuso said in a statement.
“This is inflicting further damage to the economy which is already teetering on the precipice and is on the brink of becoming a failed state further exacerbated by lockdown restrictions.”
On Monday night, President Cyril Ramaphosa addressed the nation to announce military intervention to try to bring the violence under control. He also reiterated concerns about the damage to the economy.
But despite the deployment of the South African National Defence Force to support police, the looting and violence continued. More businesses — including Sapref, the country’s biggest fuel refinery — were forced to close amid supply chain disruptions.
On Wednesday, Alan Mukoki, the chief executive of the South African Chamber of Commerce and Industry (SACCI), said the violence would damage confidence significantly.
“What this has now done is it has created a level of instability and uncertainty. That uncertainty means that businesses will become very anxious, they don’t know what is going to happen,” he said.
The SACCI’s business confidence index, last published in May, shows a steady decline since 2008. Another index published by Rand Merchant Bank and the Bureau for Economic Research (RMB/BER) paints a similar picture — there was a steep dip in 2008, in the wake of the global financial crisis, and although confidence had edged up since then, it was still well below the levels before the financial crisis.
Both surveys show that the Covid-19 pandemic caused confidence to reach an all-time low. But the most recent RMB/BER index, published in June, showed a rebound in the second quarter of 2021 to levels last seen in 2015.
Mukoki warned investment would take a hit.
“This level of uncertainty creates a problem for anyone wanting to invest. The people who are building malls, for instance, take a long-term view,” he said. “If you don’t know what the long-term view is now, you might not want to invest.”
According to Nedbank’s research on capital expenditure, total fixed investment activity has been weak and patchy since the global financial crisis.
The downward trend “intensified alarmingly” from 2016 onwards and between the first two quarters of 2020 fixed investment plummeted by almost 60%. Although capital expenditure recovered by 26.5% in the third quarter as lockdowns aimed at slowing Covid-19 infections were eased, “the rebound was modest compared to the second quarter’s free-fall”.
In their January report, the Nedbank researchers said the investment outlook for 2021 remained “highly uncertain”.
Intellidex chairperson Stuart Theobald agreed that the prevailing unrest was damaging investor sentiment.
“From a global perspective, whenever you analyse the risks of an economy, safety and security is one of the factors you always consider,” he said.
Historically there has not been a major perceived risk to infrastructure in South Africa, Theobald said. But, he added, “This situation has changed that. From now on, this adds an additional risk to South Africa and investing in South Africa. And that’s going to be negative for the wider economy. And, of course, that is negative for economic growth and for socioeconomic development.”
Structural reforms, as well as economic tailwinds such as strong commodity prices have supported the investment case for South Africa.
In recent months, the government has announced a number of reforms — in line with its Covid-19 recovery plan — aimed at resuscitating the economy. These include the sale of SAA, the restructuring of other state-owned entities and plans to expand private energy generation.
“And now you have a security situation that detracts from the investment case,” Theobald said. “So you have a series of negatives that have now arisen, whereas the structural reform programme was starting to deliver some real positives.
“And I guess the take away from a policy perspective is once we’ve dealt with the security situation, we have to redouble the efforts and structural reform to build the momentum and positive case that structural reforms create.”
Thin reform, slow response
Omega Collocott, the director of corporate ratings at S&P Global, said retail and transportation would take a serious hit as a result of the violence and looting. In May, S&P kept South Africa’s sovereign credit rating at BB-, three notches below investment grade status.
“The question is if investors are going to want to invest in these sectors, if this type of event could be foreseen as happening again with a fairly under-capacitated response,” Collocott said.
“So for sure, this will damage confidence — not only domestic consumer confidence in the system. But I think from an international investor confidence perspective, this is a very damaging event.”
The looting and vandalism are one part of the damage, Collocott
added, “but I think the government’s rather muted response is also of concern”.
According to S&P Global sovereign ratings director Ravi Bhatia, the big disparities that exist in South Africa’s economy have always had the potential to flare up.
“And it has flared up. On one level it is something that we see in other emerging markets, especially against the backdrop of Covid and the worsening situation — the big contraction in growth and rising unemployment … The other angle is that the government has been very slow moving on reforms and on all fronts,” Bhatia said, adding that the current unrest was symptomatic of this slow response.
“That’s what we are seeing on the reform side as well. The problems are there. The problems are big. And the reform effort is in the right direction, but it has been slow.”
Bhatia said the government’s existing model is failing to deliver. “Things were going along for a number of years, based on commodity demand, among other factors. But now what we have seen over the last decade is falling or stagnating incomes per capita and very poor growth.”
Government will have to think about how it delivers growth, he added.
“That means doubling down on structural reform and tackling some of the issues it has discussed, but has not really fully dealt with.”
The government’s economic recovery plan — devised to pull the country out of its decade-long slump and worsened by the pandemic — is not entirely clear, Bhatia noted.
“It is a kind of traditional fiscal spending plan in an era where there really is no great fiscal room. It’s not clear how it’s going to deliver the rapid growth that is required.”