The Call

Risk #10: South Africa

Risk #10: South Africa

Note: Today is the tenth in a series of posts that detail Eurasia Group’s Top Risks for 2013.

Jacob Zuma’s reelection as ANC president will hasten the decline of South Africa’s dominant political party and increase social pressures on the continent’s most advanced economy. As elections loom in 2014, critical reforms will fall victim to more populist policies.

On the surface, the ANC’s December 2012 national conference at Mangaung struck a surprisingly market-friendly tone: Zuma and his allies defeated his most populist challengers, elected labor-leader-turned-tycoon Cyril Ramaphosa as deputy president, dropped any mention of nationalization from the party’s platform, and rammed through an endorsement of the pragmatic National Development Plan (NDP). But beneath the surface, worrying trends have become apparent.

The ruling party’s policy of strategic state ownership introduced further policy uncertainty to the mining sector (especially on taxes) and paved the way for a heavier state presence in industries like energy and steel. The government is now more likely to use the threat of new taxes to try to secure cheaper inputs for state-run energy and infrastructure projects.

The NDP will probably provide too little, too late. The plan’s most critical reforms — more flexible labor laws, education reform, and rationalizing local government — will probably be scuttled by vested interests and weak governance, and its 20-year plan for expanding employment and reducing inequality is too broad and too long term to offer much-needed near-term help. As a result, the plan’s more populist elements — including boosting public-sector employment and social spending — will be implemented first, further limiting government’s ability to find longer-term, structural fixes. Ramaphosa’s business experience and negotiating skills will help the NDP’s cause. But the plan lost its primary champion when former finance minister Trevor Manuel resigned from the ANC’s National Executive Committee.

Zuma’s demonstrated ability to survive internal challenges will relieve some of the factional pressures within the ANC leadership: All top six party executives are now Zuma allies, and the president’s most vocal challengers were uniformly eliminated from the 80-member NEC. Yet this winner-take-all outcome will also reduce the ANC’s so-called broad church of leaders and supporters, further undermining the party’s monopoly on political legitimacy among black South Africans and increasing the risk of social unrest.

Despite its electoral dominance — the ANC won 65.9 percent of ballots cast in 2009 — growing voter apathy and discontent with the pace of economic change has substantially reduced turnout, meaning the ANC now has the support of just 50 percent of registered voters. Anger over inequality has also driven a rise in violent protests, including frequent demonstrations against poor service delivery and last year’s wildcat strikes in mining and farm communities. In general, these actions have been instigated by disgruntled or former ANC-affiliated leaders trying to exert influence from the outside.

These trends will continue in 2013. The new ANC leadership will alienate leaders and constituencies from the same areas where protests and strikes are most common, and government efforts to exert tighter control over provincial resources will exacerbate local tensions. Cutbacks and shutdowns by gold and platinum miners in the first half of 2013 — as well as the June expiration of wage agreements in the gold and coal sectors — will almost certainly spark another bout of labor unrest in the mining sector, especially given the weakened position of the government-aligned National Union of Mineworkers and the rise of more militant bodies such as the Association of Mineworkers and Construction Union. Combative stances are also likely from the Congress of South African Trade Unions.

The bottom up pressures will weigh on the ANC in advance of the 2014 elections, as will the scandal-plagued leadership of Zuma himself. Though Ramaphosa’s respectability provides the party with badly needed cover, the ANC government will still have to focus on short-term spending and patronage to shore up support. Looser monetary policy is also a real possibility, as is a more aggressive (though still tempered) approach to land reform. Without these steps, continued bouts of social unrest may well shake investor confidence more than unwelcome policies.

Bottom line: Zuma is not Nelson Mandela, and the ANC no longer has enough credibility with poor South Africans to (once again) ask for patience in achieving a better life.

Next, we’ll profile our "red herring" risks for 2013.