The pandemic and associated vulnerabilities continue to weigh down fragile economies with constrained fiscal space for maneuver and excessive dependence on commodities from controversial sources. South Africa is an example of a country where recent developments have cooled down economic prospects, narrowing opportunities for younger generations.
The South African government faces a plethora of challenges as a result of the pandemic, recent social unrest, and economic stress. The convergence of these three issues, combined with weakened state-owned enterprises, may compromise fiscal consolidation. In order to address these economic challenges, the government needs to contain expenditures on public sector wages and reduce administrative costs – measures that could intensify the current social unrest.
Furthermore, commodity exports are expected to remain affected by high production costs in the region, narrowing the potential profits for extractive operations. In the short term, exports will likely be afflicted by diminishing demand for certain commodities, including gold, platinum, and iron ore — South Africa’s top three exported commodities in recent times.
The issue is the end markets. Pre-pandemic, China, Japan, and India were the largest consumers of these commodities. However, due to the pandemic’s impact on shipping, ports, and terminals, accessing these markets is now more challenging. This has been further exacerbated by the economic pressures facing countries in the Asia-Pacific region, due to demographic transitions in China and Japan, and the ongoing proliferation of COVID-19 in India.
An amalgamation of economic pressures and the jailing of former President Zuma brought about violent protests in the country in July 2021 – the worst civil unrest since the apartheid regime. The magnitude of these nationwide demonstrations presents a critical threat to the domestic economy, over the short and medium term, in a country that is among the worst afflicted by the pandemic in Sub-Saharan Africa. As of July 2021, only 2.7% of the South African population had been double vaccinated, due to the process in accessing and disseminating vaccines (see Figure 2). With the notable exception of Morocco – where 27% of the population has been double vaccinated – the entire African continent is showing concerningly low percentages of vaccination, especially in countries with a lower median age.
The civil unrest presents a real threat to South Africa’s ability to recover economically from the 7% contraction recorded in 2020. Furthermore, the disparity in domestic economic distribution underscores the palpable discord in South African society, which exacerbates the government’s ability to enact its reform agenda.
Past experience in mishandling large-scale infections, such as HIV, represents a dramatic precedent for the country. AIDS-related deaths have remained prevalent in South Africa for more than two decades. At its peak in 2006, HIV infections contributed to almost 40% of South Africa’s deaths; HIV has remained responsible for 15% of deaths in recent years. With 29% of the population below 18 years of age, a group that is currently excluded from COVID-19 vaccination plans, the potential for new variants to develop and for the virus to proliferate in the region is high. Between July 1, 2020, and June 30, 2021, female and male life expectancies in South Africa declined by 3.8 years and 3.1 years, respectively, to an average of 59 years for men and 65 years for women.
A lack of transparency at an institutional level has acted as a source of disillusionment, following former President Zuma’s arrest for contempt of court, and his refusal to provide evidence in an investigation into high-level corruption in the country. Protests initially started in KwaZulu-Natal, Zuma’s home province, before proliferating across the country, including in Johannesburg. Outside of KwaZulu-Natal, the rates of economic inequality – South Africa is among the top 10% countries globally in this regard – and youth unemployment were the main drivers of the civil unrest.
More than 70 people died during the protests, as infrastructure vital to economic productivity was targeted. South African insurers estimated damage costs at up to US$700 million, while Mxolisi Kaunda, the mayor of eThekwini in KwaZulu-Natal, said 40,000 enterprises were affected in that municipality alone. The aggregated cost of damage resulting from the unrest is expected to total 0.3% of the country’s 2021 GDP.
If the unrest continues, the growing recovery recorded in the first half of the year may be put at risk. The first quarter saw a 1.1% increase in real GDP quarter-on-quarter, corroborating improved confidence indicators in both the business and investment environments. Forecasts had indicated the country would benefit from a strong global economic backdrop, low interest rates, and the rollout of the COVID-19 vaccine program in the second half of 2021.
The current situation, however, is likely to adversely affect sentiment in the consumer, business, and investment sectors. As these pressures converge with the mounting COVID-19 infections recorded in May, June and July, the previously forecast GDP growth over the rest of 2021 is clearly at risk.
The World Health Organization has warned that a surge in COVID-19 cases may result from the widespread rioting in South Africa. The government expected to receive vaccine doses in the second half of 2021, and made plans to vaccinate 40 million people to achieve population immunity by the close of 2021. As both the AstraZeneca and Johnson & Johnson vaccines have been temporarily suspended as of July 2021, this ambitious target is more likely be met by the close of 2022.
As a result of these burdens, the government is expected to face sizable challenges in restoring public finances. Stagnation in the economy would exacerbate the already predicted reduction of tax revenues. Meanwhile, the government is likely to step in to support private enterprises impacted by the protests, in addition to paying for the restoration of damaged infrastructure.
The demographic profile of the protestors (generally young, public sector employees, crucial for maintaining the government’s mandate) also constrains the scope for recovery, as existing discord between demonstrators and the government stems from prolonged negotiations on public sector wages. Policy predictability, at large, remains questionable. Land reform and the possible expropriation without compensation for stranded assets are still hotly debated topics, which divide opinion while potentially harming South Africa’s image as a destination for foreign investment.