03 Aug South African Blues
South Africans went to the polls today to vote in municipal elections. Local politics may sound insignificant, but the world is watching. That’s because the African National Congress is facing some of the toughest electoral challenges it’s seen since it won power in 1994, marking the end of the era of apartheid.
Urban voters in particular could help to erode the ruling party’s power. Onlookers think the ANC could lose Johannesburg—the nation’s largest city—and the municipality that includes Pretoria, one of its three capitals. Large ANC losses could set it up for an even greater challenge in the 2019 general actions. Its rivals include the centrist Democratic Alliance and the radical Economic Freedom Fighters.
Political scandals and economic weakness have driven the party of Nelson Mandela to this moment of reckoning.
For one, many voters are fed up with the perceived misconduct of ANC leader Jacob Zuma. His most high-profile scandal involved the improper use of state money to make improvements to his private home. As a result, he has been ordered to pay back hundreds of thousands of dollars. Rather than doing so quickly, he dragged his feet for quite a while. In April, the National Assembly called a vote to impeach the president after a court ruling that Zuma had failed to uphold the constitution by keeping the funds.
Critics have also accused Zuma of granting too much influence to the wealthy Gupta brothers, a family of business magnates with stakes in industries ranging from mining and engineering to technology and media. For instance, a government official claimedone of the Guptas had offered him the position of finance minister in the president’s government. Two of the brothers have since left the country. These are only a couple of the manifold scandals that have dotted Zuma’s career.
Disillusionment with politics isn’t the only reason voters may turn their backs on the ANC. The weak economy is another important factor, driven in part by the slowdown in China, South Africa’s biggest trading partner since 2008.
The Middle Kingdom’s economic deceleration has had a major impact on commodity prices, which play a big role in South Africa’s economy. Mining makes up 60% of the country’s exports and contributes 8% of its GDP, with another 10% coming from related industries. Key metals and minerals mined include gold, platinum, iron, and coal. China’s slowing appetite for these and other commodities has hurt the sector. Between 2012 and 2015, mining employment fell by 47,000. And because commodities make up such a big percentage of the country’s exports, the price decline has hurt its currency: since August 2014, the rand has fallen 30% against the dollar.
Mining makes up 60% of South African exports and contributes 8% of the country’s GDP
The price of platinum, for instance, has fallen from its 2011 peak of over $1,850 per ounce to under $1,200 today. As the world’s biggest producer, this decline hits South Africa the hardest: in 2015, 73% of platinum mining production came from South Africa, and the country is estimated to control 95% of the world’s platinum group metal reserves.
Low prices aren’t the only factor hurting the economy, though. The country’s mining industry has also been plagued by labor unrest. Meanwhile, a drought has inflated food prices, while electricity shortfalls have led to blackouts and stunted growth. All things considered, the IMF predicts South Africa will grow just .1% this year. Investors should take note, as the country makes up 7.31% of the MSCI Emerging Markets Index.
In addition to global price fluctuations, there are also long-term structural issues plaguing South Africa’s economy and society. The unemployment rate is 27%, and 48% for blacks between the ages of 20 and 24. And there are huge disparities between blacks and whites: the overall unemployment rate for the former is 30%; for the latter, 7%. More than 20 years after apartheid ended, racial tensions remain a part of everyday life in the country. Further, South Africa is one of the most unequal countries in the world, with the top 10% controlling as much as 65% of the wealth.
Are there any bright spots on the horizon? Thanks to rising global uncertainty, the price of gold has surged 26% since the start of the year. Unfortunately, South Africa is not the major player in the yellow metal it once was: it is the source of only 6% of the world’s gold, its production declining by 85% since 1980. Still, the rising price could give the sector a welcome boost.
Even more encouraging has been the legal institutions’ handling of the Zuma corruption probe. The president’s agreement to pay back the misdirected funds is a testament to the independence of the country’s judiciary, an important asset for the flourishing of a country.
Further, a broader measure of South Africa’s institutions—The Heritage Foundation’s Index of Economic Freedom—puts it ahead of 85% of its African peers. Another bright spot in the economy is wine production. According to CNN, the country produces 4% of the world’s wine, and volume grew 20% over the past four years. On top of that, the industry’s contribution to GDP has grown at least 10% every year since 2003. So if you want to pitch in to South Africa’s recovery, maybe share a bottle from the Constantia Valley with friends this weekend.
Whatever happens in today’s election, much work remains to be done to heal South Africa’s economy and society. Despite the clouds over South Africa’s horizons, we should pause and reflect on its potential. As Nelson Mandela said in a documentary from 1994, the year of his election, “Do not judge me by my successes, judge me by how many times I fell down and got back up again.” Evaluating the country by Mandela’s criteria, the opportunity for South Africa is tremendous.