South Africa: Year in Review 2012

The exacerbation of some of South Africa’s more intractable economic weaknesses – including contentious labour relations and tensions and uncertainty within the ruling African National Congress (ANC) – have combined to make 2012 a hugely challenging year for the continent’s largest economy.

Tens of thousands of South Africa’s miners downed tools in August, halting production on most of the country’s gold and platinum fields, in a call for substantial wage increases to offset rising inflation. Tensions spilled over in Marikana on August 16 when police opened fire on striking miners during a confrontation that left 34 dead and another 78 wounded. While a government-backed inquiry into the incident is expected to be completed in 2013, the fallout may have long-lasting effects.

Although most of the miners had returned to work by late October after securing improved wages and benefits, the long-running disputes cost the economy dear, significantly contributing to slower growth. Nor is this the first time this has happened, with similar episodes in 2011 and 2010. Labour relations are tricky at the best of times in South Africa, and not only in the mining sector, given the combination of price sensitivity faced by export-dependent firms and the need to reduce socioeconomic disparities amongst the broader population. Indeed, as the country moved on from its focus on mining strikes, the farming industry, in particular in the Western Cape, saw violent protest continue into 2013.

In its latest revision of GDP performance, issued in October, the Treasury revised its 2012 forecast for economic expansion down from 2.7% to 2.5%. Some analysts suggest that the Treasury’s reassessment could still prove to be optimistic. Growth for the third quarter was the lowest since 2009, dropping to 1.2% from 3.4% in the second quarter.

Part of this is due to the country’s level of economic sophistication and the extent of its integration into the global markets. African economies that are more insulated from the fallout of the international slowdown have seen robust growth, but South Africa’s export dependency has left it vulnerable to fluctuations in demand abroad.

Inflation remains roughly within the targeted band, hitting 5.2% in November, according to data issued by Statistics South Africa.

International ratings agencies also had mixed opinions about South Africa’s prospects for 2013. In mid-January Fitch Ratings downgraded South Africa’s credit rating from BBB+ to BBB due to slower economic growth, a growing budget deficit and increasing unemployment, though it did raise the country’s outlook from negative to stable. Although Moody’s forecast of 3% GDP in 2013 is higher than that given by a business leaders’ survey conducted in December, the agency lowered its outlook for the banking sector on December 5 from stable to negative, citing slower economic growth which it said was putting pressure on assets. In October, S&P cut its long-term foreign-currency rating from BBB+ to BBB.

Investors are also likely to be concerned by the groundswell of support in favour of nationalising some of the country’s key industries, including the mining and banking sectors. The topic of nationalisation has been hotly debated during the year, fuelled by the controversial former head of the ANC’s youth league Julius Malema and brought to the fore by the Marikana shootings. However, re-assurances came at the December ANC policy and leadership conference in Manguang that mine nationalisation is something that the leadership party rejects outright.

While most analysts expect South Africa to avoid slipping back into recession in 2013, growth may be restricted unless the government is able to move capital into the economy through its long-term, but much-delayed infrastructure investment programme. Although some projects are being pushed forward, such as a $5.8bn scheme to revitalise the country’s ageing passenger rail network, many others are still awaiting implementation.

However, the slow rollout of state infrastructure projects is prompting some firms to expand activity abroad by tapping into regional markets. The increasing number of domestic construction companies looking to broaden their horizons will help boost the sector’s standing on the stock exchange and give many of these firms some breathing space until the government is able to step up its own spending programme.

The lowering of South Africa’s credit ratings will make it more difficult for the government to raise funds and attract private investors to its public-private developments. With inflation and unemployment still high and confidence low, the New Year may well present further fall-out from 2012 and even more challenges.