• Economic Research

State of the nation: South Africa at a crossroads

South African President Cyril Ramaphosa delivered his State of the Nation address on June 20, having led the ANC to victory in May’s elections. But his administration needs to move fast to address an economic slowdown, argues Bryony Deuchars.

5 minute read

Cyril Ramaphosa
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As President Cyril Ramaphosa rose to deliver his State of the Nation Address in South Africa’s wood-panelled Houses of Parliament building on June 20, he must have felt a mixture of optimism and concern. Optimism, because he has proved his mettle as leader of the African National Congress (ANC), winning a convincing mandate at the polls; concern, because he is keenly aware South Africa faces significant economic challenges.

Although its share of the vote fell in May’s general election, the ANC defied gloomy predictions of electoral collapse. This has strengthened Ramaphosa’s hand: he has pledged to root out the corruption that has drained the party’s moral authority and win back voters’ trust.

But the president is also keenly aware of the need to tackle wider problems in South Africa. Output is falling and unemployment rising, particularly among young people. The state electricity provider, Eskom, is on the brink of bankruptcy. And the government’s own fiscal position is worsening: a downgrade from ratings agency Moody’s would plunge the country’s bonds into junk status.

So how does Ramaphosa plan to tackle these problems? And what are his chances of success? In this Q&A, Bryony Deuchars, emerging market equities fund manager at Aviva Investors, explores the implications for South Africa’s economy and markets.

MSCI South Africa Index vs. MSCI EM Index
Source: Bloomberg, Aviva Investors, as at July 1, 2019. Rebased 2 July 2018 = 100.

How would you appraise the ANC’s performance in the May general election?

There was considerable uncertainty in the run-up to the vote. The market sold off in April, reflecting those concerns – although the US tariffs on China, which hit wider emerging markets, also contributed to the poor performance. The market consensus was that if the ANC’s vote share fell below 55 per cent that would be a bad result – in that respect, the final figure of 57.5 per cent was relatively positive. But you can’t ignore the fact that’s almost five percentage points lower than in 2014. Ramaphosa and the ANC have work to do to win back trust.

Ramaphosa has promised to root out corruption from the ANC. Will he do it?

Ramaphosa has come in on the mandate to rid the ANC of corruption – but at the same time he has to hold the party together. There is a faction that remains strongly loyal to his predecessor, Jacob Zuma, and he can’t afford to alienate it completely.

Ramaphosa is sensibly using the established institutions within the ANC and the wider judiciary to investigate state capture and corruption within the ranks, rather than becoming directly involved. He appointed David Mabuza, a Zuma loyalist, as deputy president – but only after Mabuza was investigated and cleared by the ANC’s Integrity Commission. That was a smart move and marked Ramaphosa out as a shrewd political operator, although recent headlines about alleged campaign funding irregularities suggest he may have questions to answer himself.1

What are the immediate challenges Ramaphosa faces?

As he identified in his State of the Nation Address, the economy is in trouble. Output fell by 3.2 per cent annualised over the first quarter, according to official figures – the worst performance in a decade. One of the major contributing factors in the slowdown was the crisis at Eskom, the state energy provider, as power shortages have hit output.

In the speech, Ramaphosa said he will speed up the allocation of 230 billion rand ($16 billion) in bailout funds to Eskom (under the original plan, the company would receive R23 billion per annum for ten years). Some of this money may come from the long-delayed auction of new broadband spectrum, which will boost the government’s income. It was disappointing his speech did not specify how much will finally be required to put Eskom on a sure footing, and how this will be financed, although subsequent media reports suggest more details will be announced by mid-July, including the new appointment of a chief restructuring officer.2

How much of an economic risk does Eskom pose?

Beyond the chaos caused by power outages, Eskom’s woes are linked to the government’s fiscal path. If the company defaults on its debts – many of which are guaranteed by the state – it would make the state finances even more vulnerable. This could prompt Moody’s to follow S&P and Fitch in downgrading South Africa to junk status. While Moody’s rating looks safe for now, that could change quickly. The situation is critical: if South Africa lost its investment-grade status it would fall out of indices including the FTSE World Government Bond Index. The International Monetary Fund estimates this could lead to outflows of $1.5 billion, putting the government’s finances under further pressure.3

Will Ramaphosa’s administration be able to address these problems?

Ramaphosa should be able to make some headway in negotiations with the Eskom union, which has blocked previous moves to restructure the company. As a former union leader, he is respected in the labour movement – his candidacy for the ANC leadership was endorsed by both the South African Communist Party and Goldman Sachs.

Just as important for the government’s wider objectives, Ramaphosa has a skilled team in place, including the well-respected finance minister, Tito Mbowene, former governor of the central bank, and Pravin Gordhan, the minister for state-owned enterprises – these will be hugely important roles over the next five years. The presence of such experienced technocrats is reassuring markets for the time being, despite the parlous state of the public finances. But progress thus far has been disappointingly slow.

What are the government’s longer-term objectives?

The State of the Nation Address covered all of the big issues: job creation; education outcomes; developing a world-class visa system to boost tourism; and reducing poverty, violence and inequality. As Ramaphosa admitted in his speech, South Africa needs job creation – he cited this as the “concern that rises above all others”, pointing to the official youth unemployment rate of above 50 per cent. He pledged to create two million new jobs over the next decade, some of which will come from a labour-intensive public works programme.

Where do equity investors need to see progress?

Beyond the Eskom situation, investors will be keeping an eye on two priority areas in particular: infrastructure investment and land reform. The president confirmed the Development Bank of Southern Africa will manage a R100 billion infrastructure fund, which is seeking contributions from foreign institutional investors. On the land reform issue, Ramaphosa indicated that, rather than expropriation of assets without compensation, the government is looking to identify parcels of state-owned land that can be distributed to companies and farmers for development. As with the other policy areas outlined in the speech, Ramaphosa was light on detail. Given the desperate state of the economy, South Africa requires concrete proposals sooner rather than later. 


  1. Mkhwebane investigates Ramaphosa over R400m ANC presidential campaign donation,’ Sunday Times South Africa, June 2019
  2. South Africa Says Eskom Creditors Won’t Lose Out in Restructure,’ Bloomberg, June 2019
  3. Eskom bailout risks S. Africa Moody's rating, Reserve Bank says,’ Bloomberg, May 2019


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