Trial and tribulation
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Emerging Markets

Trial and tribulation

South Africa and its ruling ANC face acute challenges as the pending trial of its new leader coincides with an economic slowdown – and soaring inflation

By Nadine Marroushi

South Africa and its ruling ANC face acute challenges as the pending trial of its new leader coincides with an economic slowdown – and soaring inflation


It’s going to be a tough year ahead for the African National Congress, South Africa’s ruling party. Tough on two fronts. Politically, its leader faces a trial on allegations of racketeering, money laundering, corruption and fraud. Economically, despite years of impressive growth, growth is slowing while inflation is rising sharply. 

A bumpy ride

South African analysts say the short-term economic slowdown and gloomy outlook for inflation are part of a natural cycle and that, in the long-term, growth will pick up. Rand Merchant Bank’s chief economist Rudolph Gouws reckons the economic slowdown is “only an interruption and not a reversal of the long-term growth trend”.

Gouws tells Emerging Markets that “given the impact of a slowing world economy and hikes in interest rates by the central bank, consumer spending is down and is forecast to continue this year. This will take GDP growth from 5% to 4% in 2008, but growth is likely to pick up in 2009.”

But with inflation expected to stay high for 2009 and possibly beyond, a growth spurt may take longer. 

Democratic Alliance’s finance spokesperson Kobus Marais tells Emerging Markets: “Domestic policy failures and the national energy crisis which, when coupled with the political instability that has arisen as a result of the ANC succession race, leaves little doubt that South Africa, at least in the short to medium term, will not achieve the sustained levels of growth that were achieved in the last five years.”

Since mid-2006, the South African Reserve Bank (SARB) has tightened monetary policy to curb inflation. But by April, interest rates had reached 11.5%. 

SARB is no longer looking for inflation to return within the 3%-6% target range until late 2009. In January, it still expected inflation to be below 6% by the last quarter of this year. With the oil price continuing to rise, Standard Bank’s chief economist Goolam Ballim puts the benchmark rate of inflation at 9.8%.

SARB’s inflation forecast does not take into account further increases in electricity prices, expected to be approved by the National Energy Regulator in response to the power crisis. State-owned Eskom Holdings, which generates around 95% of the country’s power, has requested a further increase of 53% in electricity prices after they were raised by 14% in April. It is also asking for tariffs to be lifted by 43% in the next financial year. 

The shortage of power generation capacity is expected to last at least five years. Says SARB governor Tito Mboweni: “I don’t think things are going to get easier soon.” 

Trevornomics

Unemployment has fallen in the last year, but still stands at 23% of the workforce. The ANC plans to stimulate growth through a massive public investment programme.

Finance minister Trevor Manuel estimates that government spending in 2008 will reach R542.4 billion ($71 billion), which includes spending R2.3 billion on developing the national industrial policy. 

ANC national spokesperson Jessie Duarte singles out transport, energy and infrastructure as priorities. “We are also implementing a national industrial policy that focuses on the growth of key sectors, including automotive manufacturing, agriculture and agro-processing, and tourism,” he tells Emerging Markets.

“In the immediate term, work is being done to secure scarce skills, both from outside the country and within,” Duarte says – a reflection of investors’ concerns.

Public test

The ANC’s biggest challenge in the year ahead will be to convince the public and international partners of its credibility and competence. This hasn’t been helped by the choice last December of former vice president Jacob Zuma as the party’s new leader. Zuma is due to face trial on corruption charges this summer. 

Despite the trial, Zuma still seems best placed to replace Thabo Mbeki as post-apartheid South Africa’s third president of the country. The ANC is by far the country’s largest party.

Even the country’s mildest critics say change is needed at the top. Mbeki’s government has been confronted by a power supply crisis that has cramped economic growth – and may even affect South Africa’s hosting of the 2010 World Cup. 

Criticism of Mbeki’s regional policy has grown ever louder. His so-called “quiet diplomacy” looks a failure and has only appeared to keep Zimbabwe’s president Robert Mugabe in power longer and prolong the devastation and oppression of the country.

Naturally enough, the opposition party, the Democratic Alliance, is one of Mbeki’s more strident critics. Its foreign affairs spokesperson Tony Leon tells Emerging Markets: “Mbeki has repeatedly failed to provide credible leadership on the Zimbabwe matter, most recently by claiming that there is no crisis following the elections there, and by his refusal to put the matter on the agenda at the recent meeting of United Nations Security Council (UNSC). This is despite calls from UN secretary-general Ban Ki-moon and various heads of state that he do so.

“Mbeki’s failure to use South Africa’s presidency of the UNSC to address the Zimbabwe matter will in all likelihood put paid to any remaining aspirations we cherish for a permanent seat on the Security Council,” says Leon.

Policy-making will be shaped around the ANC’s need to prove that it can continue to deliver on its promise of faster growth – which reached an average of 5% over the last four years – and above all, more equitable growth. 

With presidential elections due in 2009, all eyes will be focused on the Zuma trial. Ever since the first fully democratic elections in 1994, the ANC president has always gone on to lead the country. 

Scorpion bite

The biggest test for the ANC will be to make sure the trial is credible. Zuma’s many supporters say the charges are politically motivated. 

Controversy already rages about plans to incorporate the Scorpions, the National Prosecuting Authority unit that investigates high-level crime and corruption, into the police – depriving it of its statuary independence. The ANC’s Duarte says, “the decision is based on the need to strengthen the government’s crime-fighting capacity. By incorporating the policing functions of the Scorpions into the South African Police Service, we will be removing the scope for competing mandates, improving coordination and giving the police more specialist investigating capacity.” 

Critics don’t agree. The Democratic Alliance’s security and safety spokesperson Dianne Kohler-Barnard says: “The ANC government has forwarded no credible reasons as to why it must disband in such a hurry the most effective crime-fighting unit that South Africa has ever seen with a conviction rate that has remained between 82% and 94% since 2002 – according to the National Prosecuting Authority – and one which has been turning the tide on organized crime at the highest levels and restoring public faith in our criminal justice system.

“The move would rob South Africa of an investigative body whose independence from the police renders it capable of ‘guarding the guards’.” 

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