Zuma Turmoil Leaves South Africa’s Economy Down But Not Out

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Jacob Zuma.

Photographer: Waldo Swiegers/Bloomberg
  • Country remains Africa’s favorite investment destination
  • Rand is fourth-best emerging-market currency this year

At first glance, South Africa appears on a road to nowhere, mired in leadership turmoil and economic stagnation that are rolling back many of the hard-won gains of 22 years of multiracial rule.

President Jacob Zuma, who’s lurched from one scandal to the next, is warring with his finance minister over control of the National Treasury. Government and ruling-party officials are at each others’ throats over policy, appointments and alleged cronyism. And the risk of the nation’s credit rating being downgraded to junk by year-end is mounting as the infighting detracts from efforts to ignite growth and fight unemployment.

Yet all is far from lost for Africa’s most industrialized economy. The country last month held its 10th straight credible election since apartheid ended, one that heralded the onset of real political competition as the ruling African National Congress lost control of major cities. Zuma, who must step down in 2019 after serving the maximum two terms, has been held in check by a vocal opposition that secured a Constitutional Court order forcing him to repay taxpayer funds spent on his private home.

“The economy is much more resilient than many people give it credit for,” said Dave Mohr, who helps oversee 110 billion rand ($7.6 billion) as chief strategist at Cape Town-based Old Mutual Multi-Managers. “We have managed to avoid a full-scale recession despite the collapse in commodity prices, tighter monetary policy, the worst drought in living memory, a hostile international environment and all this political and policy uncertainty. We will still be here when all this turmoil blows over.”

For a quick wrap of South Africa’s troubles, click here.

Besides having a noisy democracy, South Africa also boasts Africa’s best transport links and energy supply, and a financial system that the Geneva-based World Economic Forum ranks among the world’s best. Accounting firm EY ranked the country Africa’s most attractive foreign direct investment destination last year, and government debt levels and the budget deficit are well within limits recommended by the Paris-based Organization for Economic Cooperation and Development.

In addition, South Africa is the world biggest producer of platinum and manganese. Citigroup Inc. said in 2010 that the country’s mineral deposits were worth $2.5 trillion, the most of any nation.

Much of the blame for the hard times has been directed against Zuma, 74, who is accused by opposition parties of abusing his post to further his own financial interests and those of his allies, and against the ANC for failing to hold him to account. The party, which led the fight against apartheid rule before taking power under Nelson Mandela in 1994, saw its share of the national vote drop to a record low 54.5 percent in Aug. 3 local elections. It lost control of Johannesburg, the economic hub, and Pretoria, the capital.

The president is fighting a lawsuit filed by the Democratic Alliance, the main opposition party, aimed at forcing prosecutors to reinstate 783 graft charges against him that were dropped just weeks before he was sworn in as president in 2009.

Family Business

Deputy Finance Minister Mcebisi Jonas said members of the wealthy Gupta family, who were in business with Zuma’s son and employed one of his four wives, had offered him a ministerial post in exchange for business concessions. In a statement issued by their spokesman, the family dismissed the allegation as a political ploy. Zuma said only he had the power to make ministerial appointments and has repeatedly denied ever intentionally breaking the law.

In December last year, Zuma sparked a run on the rand and the nation’s bonds when he appointed little-known lawmaker David van Rooyen as his finance minister in place of the respected Nhlanhla Nene. Van Rooyen lasted four days. Since then, Zuma has been accused of seeking to undermine successor Pravin Gordhan by, for instance, refusing his request to fire the nation’s tax chief for insubordination. 

Gordhan, who denies having done anything wrong, said the political crisis will pass and the country’s future remains bright.

Turbulent Times

“Of the emerging markets we have the least problems,” he told the Cape Town Chamber of Commerce and Industry last month. “Yes, we are going to have turbulence. Name me one country that doesn’t have some kind of political, social or economic turbulence.”

Mzukisi Qobo, an associate professor at the University of Johannesburg, is more skeptical, saying that the harm he says Zuma has wrought is likely to endure after the president leaves office.

“South Africa is in a very hard place because the reality is that the ANC is damaged to the core,” Qobo said by phone. “There will always be a tussle between individuals within government that want to stabilize and modernize and those who are pushing very hard to open wide the trough of the state.”

South Africa’s predicament could get worse before it gets better even though Zuma has been weakened as his rule draws to a close, according to Robert Schrire, a politics professor at the University of Cape Town.

“He is a lame duck,” Schrire said. “Like Samson, he can certainly take down the roof and all the pillars. He has incredible capacity to do damage.”

Damage Capacity

The economy, meanwhile, moves on. Output expanded an annualized 3.3 percent in the second quarter, after contracting 1.2 percent in the previous three months, as mining and factory output rebounded. The central bank, which had predicted no growth this year, said it would raise its forecast although the annual figure will remain low. The government is targeting 6 percent annual growth as it seeks to halve a 27 percent unemployment rate.

The rand has gained 7.3 percent against the dollar this year, the fourth-best performer among 24 emerging-market countries monitored by Bloomberg. Foreigners have bought a net 61.7 billion rand worth of the country’s bonds so far this year, while selling a net 84.2 billion rand in equities.

Robert Jeffrey, managing director and senior economist at Johannesburg-based advisory service Econometrix, sees political will as key to South Africa achieving its economic potential.

“No damage is irreparable,” he said. “At the moment, the turmoil and the policy indecision is affecting investors in a major way. If the right decisions were made, you would find that confidence can be engendered and investors will return.”

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