South African economy is on the brink of junk status

Supporters and detractors argue over President Jacob Zuma in Durban, South Africa, in February.
Supporters and detractors argue over President Jacob Zuma in Durban, South Africa, in February.
(Rajesh Jantilal / AFP/Getty Images)

This country teeters on the edge of an economic cliff. At the bottom is the debt rating known as junk, which economists say is a distinct possibility in coming months.

South Africa would have to pay much higher interest rates to borrow money. Spending on health and education, already squeezed by falling revenue, would have to be cut, heightening widespread unrest.

What happened to Nelson Mandela’s plucky and inspiring African nation?


The answers include many things beyond its control: a worldwide decline in commodities prices; waning demand from China, its biggest trading partner; and the worst drought in 50 years.

But there is a consensus among analysts that one of the biggest problems is President Jacob Zuma.

After apartheid ended in 1994, the ruling African National Congress and business adhered to an unwritten agreement: No matter how much socialist rhetoric the government used publicly, it would always maintain fiscal rectitude and a strong central bank.

Zuma seems to have blown up that understanding.

His critics point to a litany of misdeeds, starting with expanding the civil service and stacking state enterprises with his allies to the point that nearly 40% of the budget goes to paying government workers.

His sprawling Cabinet includes 35 ministers and 37 deputy ministers, whose perks include first-class international air travel, two cars each, free housing and domestic workers.

His government has guaranteed state-owned companies $14 billion in loans, even though many of those enterprises are in distress and may not be able to pay it back.

It has also introduced a raft of bills — some of which have been approved by the Parliament — that raise doubts about the ownership rights and safeguards that had long helped draw foreign investors.

Some analysts point to one political move that seemed to sum up Zuma’s economic mismanagement: his firing late last year of Nhlanhla Nene, the finance minister, who was widely respected by investors.

Nene was replaced with a former mayor of a small municipality with little experience in finance. Four days later — after the currency and the stock market tumbled and bankers warned of a financial meltdown — Zuma backed down and removed the official, replacing him with a former finance minister.

This month, evidence emerged suggesting that a powerful business family close to Zuma may have had a hand in the firing.

Several ANC members have come forward to say that the Gupta family — which has joint ventures with one of Zuma’s sons — had offered them top government jobs on the condition that they act to advance the family’s commercial interests, which include mining, media and aviation. One was the deputy finance minister, who alleged that the family had offered him Nene’s job days before the firing.

The allegations, which Zuma and the Gupta family deny, have ignited a bitter struggle within the party between Zuma supporters and opponents.

The clash is likely to paralyze the government, leaving it incapable of much-needed economic reforms, said Justice Malala,a political analyst and author of a book on South Africa, “We Have Now Begun Our Descent.”

“There’s no real governance in South Africa,” he said. “And you have a country that’s just not working.”

Foreign direct investment plummeted to $5.8 billion in 2014, a 29% drop from a year earlier. Barclays Bank recently announced it was selling most of Barclays Africa, the vast majority of which is in South Africa. The mining giant Anglo American is also reducing its South African holdings.

About 950 millionaires moved out of the country last year, according to one survey.

The International Monetary Fund is predicting growth of 0.7% this year, with some analysts forecasting a recession.

In December, business confidence fell to its lowest level since the end of apartheid, according to the South African Chamber for Commerce and Industry.

That in large part is Zuma’s fault, analysts say.

Zuma’s rise to the presidency of Africa’s most industrialized nation is an unlikely story. The son of a domestic worker, he didn’t learn to read until he served time in prison with Mandela, who admired the way he sang and joked to keep spirits up. Charisma and street smarts carried him up the ranks of the ANC.

He was acquitted of rape charges and escaped corruption charges — prosecutors dropped them — before his election in 2009. He was reelected to a five-year term in 2014.

The 73-year-old has some unorthodox economic views. He has said, for example, that he would prefer a system in which the price of goods is determined by how long they took to make rather than the free market.

Business leaders are afraid to talk about him publicly, but off the record they say that new leadership is needed.

Zuma is also an embarrassment to the black middle class and a disappointment to the poor, Malala said.

There has been little improvement in education or healthcare, and in terms of wealth distribution, South Africa remains one of the most unequal societies. More than two decades after the end of institutionalized racism, unemployment is 40% among young blacks.

Violent demonstrations are a daily occurrence, as protesters set up roadblocks, burn tires and government buildings, flip cars or throw stones at police to register their frustration with interruptions in basic services such as electricity.

Arguing for Zuma’s removal, Allister Sparks, a longtime political analyst, recently wrote that Zuma’s continuation in office carries “the risk of triggering a populist political uprising leading to chaos and violence.”

But Zuma keeps a tight hold on the ANC national executive committee, the only body that could dismiss him. A network of patronage also keeps him in power, experts said.

Without structural changes that renew business confidence and spur growth, the country’s debt rating is unlikely to avoid junk status, they said. “The traders are already expecting that it’s a fait accompli,” said business analyst Alec Hogg, director of the website BizNews.

Standard & Poor’s rates South Africa’s credit as BBB-minus, or one notch above junk, and in December changed its economic outlook from “stable” to “negative,” a move that often precedes a rating downgrade. Fitch Ratings also ranks South Africa BBB-minus.

Peter Attard Montalto, a London-based emerging markets analyst with Japanese investment bank Nomura, said a downgrade was likely late this year or the middle of next year. Although the budget that was introduced in February cut spending, he said, it did not cut deeply enough or include policies to sufficiently increase growth.

Jakkie Cilliers, an executive director at the Institute for Security Studies, an African think tank, said in a briefing note last week that the necessary reforms were not possible “with a president prepared to see the entire governance edifice collapse in order to protect himself.”

“Today, only the early departure of Zuma has the potential to stave a downgrade,” he wrote.

Pravin Gordhan, the new finance minister, said this month that South Africa had just three months to persuade ratings firms it was serious about solving fundamental problems.

“Once you get downgraded, on average it takes you five years or more to work your way up again, so you don’t want to end up there as a country,” he told reporters.

Gordhan has won respect from the business world by condemning the government’s failings, saying that some people believe “state-owned entities are toys for personal profit” and warned of the dangers of corruption.

But it remains unclear whether Gordhan has the political clout to take on his boss.