South Africa’s political turbulence will continue in 2017, with crucial economic reforms likely to remain on the backburner. Despite its obvious challenges, the country will remain on investors’ radar.

Investors hoping that South Africa could sail into calmer waters in 2017 following last year’s stormy passage are likely to be disappointed. At the end of the year, the African National Congress (ANC), which has dominated politics post-apartheid, is due to pick a successor to Jacob Zuma, the party leader and South Africa’s president.

He is due to stand down in 2019, when parliament will elect a new president, who will almost certainly be from the ANC. Political risk will remain elevated as candidates jockey for power and Zuma plots to ensure his preferred successor is installed.

Zuma faces several court battles that could paralyse the government. A report published last November by South Africa's anti-corruption watchdog detailed damning evidence of alleged corruption and the so-called “capture” of the state during Zuma’s presidency[1]. It recommended a judicial probe be conducted into allegations that South Africa’s leader allowed the wealthy Gupta family to vet his ministerial appointments and gain valuable state contracts. Both Zuma and the Guptas have repeatedly denied any wrongdoing.

The High Court has also ruled that Zuma should be charged with 783 counts of corruption in relation to a 1999 arms deal. The Constitutional Court decided in 2016 that Zuma had breached the constitution by failing to repay government money spent on his private home.

Not all the president’s men

Zuma’s presidency has been engulfed in crisis since December 2015 after he abruptly fired the respected finance minister, Nhlanhla Nene, and tried to replace him with a little-known backbencher. Nene’s sacking shocked voters and financial markets and significantly undermined Zuma’s authority. The president was forced to partially backtrack and appoint a highly-admired, previous finance minister, Pravin Gordhan, to oversee the economy.

Zuma subsequently manoeuvred against Gordhan, with the state prosecutor launching fraud charges against the minister. Unusually for South Africa, Gordhan fought back against the president. The charges were dropped following allegations that Zuma and his allies were attempting to discredit and remove the minister because Gordhan was blocking access to lucrative government contracts and treasury funds.

“The apparent attempts by the president to side-line the fiscally prudent finance minister have exacerbated investors’ unease”, says Jason Robinson, Africa analyst at the global analysis and advisory firm Oxford Analytica.

ANC split over Zuma

The ANC is fragmenting under the pressure with leading members of the ANC, as well as cabinet ministers and the party’s MPs, rebelling against the president. The dividing line appears to lie between those seeking to use state resources for patronage and those seeking to crack down on graft. Major ratings agencies have highlighted the ANC’s internecine struggle as a risk to South Africa’s economic growth.

In November 2016, cabinet members attempted to force the president to resign at a meeting of the ANC’s highest decision-making body. “While the ministers failed in their attempt, it is emblematic of the increasing dissatisfaction within the ruling party over the president’s behaviour and the persistent corruption allegations, as well as his handling of South Africa’s struggling economy”, says Robinson.

Bryony Deuchars, Emerging Market Equity Fund Manager at Aviva Investors, believes the ANC’s decision to stick with Zuma may reflect the party’s desire to avoid the embarrassment of abandoning another president. It previously forced the resignation of Thabo Mbeki in 2009 over allegations regarding the misuse of power.

“However, it remains to be seen whether or not the ANC is now running the show and Zuma is just a figurehead or whether the patronage network is so strong that Zuma is impregnable,” says Deuchars.

Voters have punished the ANC for corruption and its failure to act against Zuma. In local elections held last August, the party lost control of the key cities of Johannesburg and Pretoria for the first time since the end of white-minority rule in 1994. However, despite the opposition party gains in 2014 and 2016, the ruling party is still likely to dominate the 2019 polls; albeit with a reduced majority, says Robinson.

Frontrunners to replace Zuma as head of the ANC and almost certainly become the next president are likely to include the deputy president of South Africa, Cyril Ramaphosa, and Zuma's ex-wife, Nkosazana Clarice Dlamini-Zuma. Ramaphosa is seen by many as a safe pair of hands given his lauded history as one of the key negotiators of the 1996 constitution, in addition to his successful career as a businessman in post-apartheid South Africa, says Robinson.

The succession race

However, Zuma has recently said that South Africa is ready for a woman president[2]. “This clearly tells us that he wants his ex-wife to succeed him”, says Michael McGill, Emerging Market Debt Fund Manager at Aviva Investors. McGill adds the market would react negatively to this outcome as a lot of good news is already priced into credit prices.

Deuchars believes Dlamini-Zuma would maintain Zuma’s patronage network and ensure he makes a safe exit from the presidency, free from the threat of prosecution. “However, she has been a competent minister and could run an effective government, albeit one that would likely continue to operate under the shadow of corruption,” adds Deuchars.

South Africa’s political risk environment worsened from the start of Zuma’s presidency in 2009, a factor that has weighed heavily on economic growth; hampering business confidence and investment. Plunging commodity prices have played a part, although Deuchars says commodities, while remaining influential, are not as important to the economy as was once the case. Mining accounted for just eight per cent of GDP in the third quarter of 2016; the sector having shrunk by nearly 25 per cent since it peaked in early 2005[3] & [4]. The exact impact of political uncertainty on the economy is difficult to gauge. But the fact growth in 2015 was in the bottom quintile of emerging markets, according to the IMF, gives some indication of the effect. 

South Africans’ coinage of the word tenderpreneur further highlights the impact of political corruption on the economy. “Influential middlemen have farmed out government tenders to cronies, enriching themselves, wasting public funds in the process, and entrenching the system of patronage in politics,” says Deuchars.

Low expectations

Given the prospect of further political uncertainty in 2017, the economy will enjoy little respite this year. The IMF is projecting growth of just one percent in 2017, from a near standstill last year, insufficient to keep pace with population growth[5].

“Inflation should recede, driven by lower food prices as the impact of the drought in 2016 falls away. That should boost disposable income and consumption growth,” says Deuchars.

However, long-term structural imbalances in the economy are also coming to the fore. A lack of public and private investment is hampering the long-term growth outlook and without political reform, in particular of the labour market, this is unlikely to change.

“Although unemployment is running around 25 per cent, trade union strength has underpinned years of growth in real incomes, despite pedestrian economic growth,” says Deuchars.

She has spoken to companies who would prefer to invest elsewhere given the political uncertainty. There has certainly been a dramatic increase in overseas investment by South African businesses as they seek to diversify away from the domestic market. In the past two years, outbound M&A activity has surged with corporates ploughing 55 per cent more into outbound deals in 2016 than in 2013, according to analysis by law firms Linklaters and Webber Wentzel.

Nearly US$7billion worth of South African outbound M&A had taken place in the first 11 months of 2016, with predictions it could reach over US$8.5billion by year end. Over the last ten years, South African outbound M&A has totalled more than US$65.8billion[6].

“The authorities need to encourage investment to boost growth and avoid the social unrest brewing in the country due to poverty and lack of employment opportunities,” says Deuchars.

Figure 1: South Africa: Selected economic indicators, 2012-7 (annual percentage change, except where otherwise indicated)







Real GDP







Real GDP per capita







CPI (annual average)







Unemployment rate (% of labour force)







Unit labour costs*







Fiscal primary balance (% of GDP)







Gross government debt (% of GDP)







Current Account (% of GDP)





-4.1 -4.8
Nominal effective exchange rate -5.2 -15.4 -2.7 -16.6 -18.2 -
Source: IMF South Africa Report, July 2016, p=projection,*formal non agriculture, nominal

An IMF Staff report published in July 2016 confirms the vulnerability of the economy. Despite a large currency depreciation and notwithstanding some correction, South Africa’s current account deficit remains among the highest in emerging markets. “A combination of rising government debt, albeit at a slower rate, low growth, financially-weak state-owned enterprises, and spending pressures has increased vulnerabilities in the real and fiscal sectors”, the agency wrote[7].

The IMF believes South Africa needs “a comprehensive package of reforms, including greater product market competition, more labour market inclusiveness, better education and improved governance”[8].

The strength of the trade unions is blocking reform in many sectors. “In the education sector, unions prevent ineffective teachers from being fired and money from being spent effectively,” argues Deuchars.

The Congress of South African Trade Unions, which belongs to the decades-old triple alliance with the ANC and South African Communist Party, is represented in government.  

Deuchars also believes ratings agencies would like to see a law passed requiring secret strike ballots. However, that could be difficult given the ANC dismissed opposition calls for a secret ballot on the vote to recall Zuma last November.

The market is divided on the outlook for interest rates. “Local analysts tend to look at South Africa in isolation and see an economy that requires the stimulus of easier monetary policy,” says Deuchars. By contrast, inflation, which climbed to a nine month year-on-year high of 6.6 percent in November, is relatively high from an international perspective. Moreover, US interest rates look likely to rise further in 2017, leaving the South African Reserve Bank with little scope to cut borrowing costs.

The central bank must also factor in the impact of a depreciating currency on inflation. “The resilience of the rand last year was surprising, given its perennial weakening trend. But I believe the currency will continue to depreciate steadily over time because of the country’s macroeconomic imbalances”, says Deuchars.

Michael McGill agrees that the macro imbalances suggest investors are right to be cautious on the outlook for the currency, but believes “the sizeable depreciation of the rand in trade-weighted terms over the past five and a half years, and attractive long-term valuations and yield, should provide some support to the currency.”

In early December, South Africa narrowly avoided a ratings downgrade to junk bond status, but the reprieve could prove temporary given the expectation of further political and economic turbulence this year. Deuchars believes Gordhan has done a good job of placating the rating agencies by producing a restrained budget, implementing a spending ceiling, and providing realistic growth forecasts.

“Without reforms, a downgrade to junk is unavoidable”, Deuchars claims.

McGill believes that debt markets see parallels between South Africa and Brazil, another emerging market country that has experienced significant political turmoil in recent years. This is a mistake, according to McGill, because the political dynamics are different.

“The markets underestimate the determination of Zuma and his cronies to stay in power regardless of the cost to the country. Support for Zuma within the ANC remains significant and a change of president will not necessarily solve the country’s underlying problems. Structural reforms are needed to create growth and this is difficult given South Africa’s political instability,” notes McGill.

Investment implications

Clearly, a short-term cyclical economic rebound should prove positive from an investment perspective, says Deuchars, adding that it is easy to take a pessimistic view of the country given the economic and political challenges it faces.

“However, the quality of the companies that operate in South Africa continues to surprise. Year in year out these businesses deliver good results in a highly challenging political and macro environment.”

This view is confirmed by the IMF, which notes the balance sheets of most private corporations remain strong despite the difficult political and economic backdrop[9].

There are a large number of stocks that generate high, sustainable and growing returns, exercise good capital discipline, paying attractive dividend yields and trading at cheap valuations. The standard of corporate governance also stands out in relation to global emerging markets. Barclays Group Africa is a clear example, says Deuchars.

After rebounding from mistakes in the past, the bank has a strong domestic franchise and generates an attractive return on equity and yield. “The valuation is attractive, reflecting the market’s failure to recognise the bank’s strategic recovery in South Africa,” adds Deuchars.

She cites the diversified conglomerate Bidvest as well as Steinhoff, a discount furniture and home wear company, as other examples of well-managed South African stocks.

South Africa still holds appeal to international investors, certainly within the global emerging market universe.

“This reflects the strength of corporate management and the country’s institutions, particularly the judicial system, which provides a bulwark against political mismanagement. This sets South Africa apart from both the rest of Africa and emerging markets in general,” Deuchars explains.


[1] Public Protector South Africa: State of Capture Report, October 2016

[2] The Guardian, 12 January 2017

[3] Statistics South Africa, Q3 GDP, 2016

[4] Chamber of Mines of South Africa, December 2016


[5] IMF South Africa: Concluding Statement of an IMF Staff Visit, December 13, 2016

[6] Linklaters and Webber Wentzel, 14 December 2016

[7] IMF South Africa Staff Report, July 2016

[8] IMF South Africa Staff Report, July 2016

[9] IMF South Africa Staff Report, July 2016

Important Information

Unless stated otherwise, any sources and opinions expressed are those of Aviva Investors Global Services Limited (Aviva Investors) as at 19 January 2017. This commentary is not an investment recommendation and should not be viewed as such. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Past performance is not a guide to future returns. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested.