By Sid Verma
Jacob Zuma, South Africa’s likely next president, is no stranger to controversy. But in the debate over the country’s economic future, the populist politician has raised the spectre of a sharp policy turnaround, just as the economy begins to falter
“Bring me my machine gun”, a revolutionary song in Zulu, could be heard on the streets of Johannesburg last year by supporters of Jacob Zuma as he battled for presidency of the African National Congress.
Zuma preyed upon the discontent at the country’s economic policies to oust president Thabo Mbeki in September. This led to the installation of an interim president, Kgalema Motlanthe, until next April’s elections. The rupture in South Africa’s ruling party has fuelled fears of a lurch to the left in a new Zuma administration, dangerously weakening South Africa’s economy through unrestrained spending.
But Zuma’s options are constrained by entrenched opposition, budgetary pressures and the need for foreign portfolio investment. Perhaps the most likely outcome is that he will disappoint his socialist allies with inaction while pressing structural reforms needed to sustain South Africa’s growth are perilously absent.
The political climate has turned sour. Mbeki’s nine-year rule ended abruptly when he was forced to stand down after a court ruling that dismissed corruption charges against Zuma and accused Mbeki of interfering in the judicial process. But Mbeki was already in a weak position: the number of people living in absolute poverty had doubled since 1994, and militant factions within the ANC had coalesced around Zuma.
With Zuma in charge, his critics and foreign investors worry about what the likely Zuma presidency will mean. They claim the former deputy president, fired by Mbeki in 2005, will seek to rip apart the conservative economic platform that has governed post-apartheid South Africa.
Supporters’ aims
His unionist supporters and the South African Communist Party are urging the former guerrilla fighter to address the gap between the rich and poor within the black majority. They want him to pursue nationalization, protectionism, state-employment projects, support a budget deficit, as well as challenge the inflation-targeting and floating exchange rate regime of the central bank.
“We clearly call for a more interventionist and developmental state and reject the neo-liberal agenda adopted by the government to date,” says a spokesperson for the Congress of South African Trade Unions (Cosatu).
This would be an enormous break with the conservative economic policies of Mbeki, engineered by finance minister Trevor Manuel. Low public debt, tight spending and privatization have helped the economy grow by around 5% over the last four years and endeared the country to business leaders.
Johannesburg is sub-Saharan Africa’s commercial hub, with mature capital markets attracting a flood of foreign investors. Meanwhile, booming domestic consumption, a benign credit backdrop and an appreciating currency have resulted in the emergence of an empowered black middle class.
If South Africa wants to compete with emerging market countries such as Brazil, China and India and grow by 6% annually to erode poverty, politicians need to step up their game. “The country is out-competed by other developing countries in terms of skills and labour costs,” says Razia Khan, regional head of research for Africa at Standard Chartered. Greater investment in health and education is required but balanced with greater fiscal savings, she argues.
Global realities
But slowing world growth, cooling consumer demand due to high interest rates, and an increased public-sector wage bill will lower growth to less than 4% in the 2008–09 fiscal year. Meanwhile, electricity investment – an increasingly critical need – and infrastructure spending for the 2010 World Cup will likely lead to a fiscal deficit. This in turn will undermine any populist spending plans such as issuing grants and state housing.
Government overspending would conflict with the pro-business agenda of the new generation of black capitalists, who have benefited from the party’s liberal policies since 1994 and are still powerful within the ANC.
For this reason, instead, a Zuma presidency may focus its attention on strengthening labour laws and increase government inefficiency through state employment projects.
Observers say Zuma will disappoint his grassroots supporters since a fundamental change in policy direction is unlikely. “The unionists won’t be thrown a bone,” Moeletsi Mbeki, political economist and brother of the former president, tells Emerging Markets. “Zuma has travelled to London and the rest of the world to inform investors that economic policies won’t really change.”
Gary van Staden, political consultant to South Africa’s Bureau of Economic Research in Johannesburg, says, “Once he gets into power he will no longer need the unionists and will be forced to stick with the current spending patterns due to political and economic realities.”
But global risk appetite remains a more important near-term driver of South Africa’s economic fortunes, as the rand is effectively a proxy for emerging market risk. The country is, therefore, vulnerable to an abrupt contraction of portfolio investment.
Indeed, the perception of political risk could push the country over the edge. “The South African rand is now less attractive and is likely to be more volatile as the domestic and global risks rise,” says Kieran Curtis, fund manager of around $750 million in two emerging market debt Sicavs for Morley, the fund management arm of UK-based pensions and insurance firm Aviva.
This could leave South Africa dangerously exposed, since equity portfolio investment almost entirely funds the current account deficit, which reached its highest for more than three decades in 2007 at 7.3% of GDP.
The South African political elite to date has focused its attention on headline macroeconomic figures and structural adjustment, answerable only to the ANC executive, safe in the knowledge that their grip on power was cemented due to the party’s electoral dominance.
But the de facto coup within the party means overt pro-poor policy programmes and a greater popular engagement are now crucial to maintain power.
Zuma’s popularity with leftist critics provides him with the leverage to trumpet the social virtues of fiscal orthodoxy to his own constituency. But there is little market confidence that Zuma will battle wisely with the immediate economic challenges or engage in long-term reforms to diversify the economy and create a skilled labour force.
“I am not concerned with what Zuma is going to do in terms of economic orthodoxy but more with what he will fail to do, such as structural reforms needed to make South Africa competitive in the long term,” says van Staden.