THE reaction of the African National Congress (ANC) to a significant loss of support in next year’s election could pose a risk to South Africa’s economy, says a new research report by Bank of America -Merrill Lynch.
If ANC support falls below 60% in the elections — a distinct possibility according to political analysts — South Africa faces a risk from the possible introduction of populist measures to claw back support.
The ANC might be tempted to pursue fiscally expansive policies by raising social grants or boosting public sector wages.
"Under this scenario, South Africa would be at risk of losing its investment grade on a two-year horizon," the financial group said.
A fresh round of ratings downgrades could be triggered by weaker than expected economic recovery, potentially stemming from protracted labour unrest in the mining sector and a less supportive global environment.
In a recent report, financial services group Nomura said the ANC’s share of the national vote could drop to 56.2% from 65.9%, as several new players enter the electoral battleground.
While acknowledging the possibility of a large margin of error because of a lack of polling data, Nomura predicted the ANC would initially try much greater state involvement in the economy before ultimately realising that it was never going to work and attempting a more free-market solution for the economy.
The Bank of America-Merrill Lynch report noted that among emerging economies, Turkey and Nigeria are expected to record higher economic growth than South Africa up to 2020.
South Africa’s consumer-driven growth model is under strain as trade and credit growth become less favourable. Highly indebted households are also vulnerable to the rate-tightening cycle.
Potential economic growth in South Africa is likely to remain lower than pre-2008, when actual gross domestic product (GDP) growth averaged 4.3% a year, driven by credit and commodity upswings.
"Potential growth may have fallen by one percentage point to 2.8% following the 2008-09 global financial crisis. This has dire consequences for employment creation in the economy, which will remain exceptionally challenging," the report said.
The economy can be expected to create only 290,000 jobs annually, assuming trend GDP growth averages 2.8%.
This employment projection is comfortably higher than the post-2010 average of 90,000, but is some 30% below the 415,000 average during the 2004-08 boom years. Unemployment is expected to remain above 20% until 2020.
Two headwinds against increased growth in South Africa’s economy is that labour is too expensive relative to productivity, and South Africa urgently needs to roll out much-needed economic and social infrastructure.
According to Bank of America-Merrill Lynch, it is imperative for the National Development Plan and associated, planned infrastructural spending to be implemented.
Continuing uncertainty within the mining sector, state intervention in the sector concerning a potential resource rent tax and declaring coal a strategic mineral, need to be resolved.
Another important reform area is to encourage wage flexibility. "Moving away from the current fragmented nature of collective bargaining councils towards wage determination at a sectoral level might improve wage flexibility," Bank of America-Merrill Lynch said.
The "super cycle" in credit and commodities during the mid-2000s, accompanied by historically elevated terms of trade, suggests that the pace of economic growth over this period may have been flattered and that the true potential growth rate in the absence of these tailwinds may be a lot lower, it said.