South Africa in a tight spot

It has not been a good year for South Africa. Its currency, the rand, has slid 15 percent against the dollar because of sluggish growth, stubbornly high inflation and the flight to safety sparked by the Fed’s announcement in May that it would likely scale back its $85 billion-a-month stimulus programme before the end of the year. Unemployment currently stands at 25.6 percent. The economy managed to grow by 3 percent in the second quarter but is projected to slow in the second half of the year. Ongoing strikes have cost it billions of dollars in lost output and tainted its image among investors abroad. The three major credit agencies downgraded its credit rating to Triple B.

The barrage of downbeat economic news has come from a country until recently considered the economic powerhouse of the continent and which contributed 40 percent of the GDP of Sub-Saharan Africa. Yet last week its central bank governor, Gill Marcus, said that at its current growth rates South Africa risked being overtaken by Nigeria as Africa’s biggest economy within a decade. Furthermore, sluggish growth coupled with high inflation, which hit 6.4 percent in August, mean the central bank is in a tight spot. The sickly growth rate and high unemployment rate would call for an interest rate cut, but with inflation already breaching the central bank’s target range of 3 to 6 percent it has little room for manoeuvre.

To be sure uncertainty over the Fed’s next policy move has weighed heavily on Africa’s biggest economy. Given that South Africa relies heavily on foreign capital to finance its current account deficit, which is around 6 percent of GDP, it was particularly badly hit when investors pulled their money out of emerging markets at the prospect of the pool of cheap dollars drying up. In fact, after the Fed’s surprise announcement that it would not taper in September after all, the rand picked up a little but still has not lifted itself back to its former levels.

The economy was been badly hit by the wave of violent labour unrest in some of the country’s most important sectors, such as mining and motor manufacturing. The strikes have not been as long as last year but have definitely not burnished the country’s image abroad.

To top it all off the politics has not been that great either. The ruling African National Congress (ANC) which has been in power since the end of apartheid in 1994 has been suffering from internal splits, enduring inequality and poverty as well as corruption. Many young people in South Africa do not feel their living conditions have improved and feel increasingly disaffected with the ANC. Deputy President Kgalema Motlanthe called the country’s staggeringly high youth unemployment, which stands at 50%, a “ticking time bomb.” High levels of youth unemployment can lead to social unrest and there are fears within the ANC that South Africa is running the risk of an Arab Spring. If President Jacob Zuma is to win next year’s election and prove that his party has not failed the country he needs to step up his game.