Since the end of apartheid in the mid-1990s, there has been an unspoken pact between blacks and whites in South Africa: the former control the politics, the latter the economy.
This uneasy partnership, necessary at the time apartheid ended, has creaked along, with wealth generated for some but not all. The pact is now increasingly untenable with a continued 40 per cent unemployment rate among young black South Africans.
The plan for “radical economic transformation” to redistribute wealth was meant to have been dealt with in the heady days post-1994.
Today, while the black middle class had doubled from a comparatively low base, there are worrying trends, such as a doubling in unemployment among blacks with university degrees.
But when South Africans look northwards at Zimbabwe there is mutual agreement that perhaps the status quo is best for their country.
The question is how long is that status quo sustainable? Has South Africa reached the economic “tipping point”?
The president Jacob Zuma has possibly launched the biggest gamble of his career to force through what the ruling African National Congress (ANC) party has wanted for years – a truly level economic playing field.
The sacking of the finance minister Pravin Gordhan this month has certainly brought that one step closer because he gave the banks and blue-chip companies what they wanted – no radical change. Some also argue that given the size of his shares portfolio he had a vested interest to keep things as they are.
As sub-Saharan Africa’s most advanced economy, the broader ramifications for what might happen next are substantial. If the rand falls further then the impact will be increased inflation with a price rise on imported goods. With inflation rising, the Reserve Bank will have to hike interest rates to keep it under control. The knock-on effect from that will be higher borrowing costs that impacts on mortgages and companies looking for loans to expand. That in turn will slow an already sluggish economy – which grew just 0.3 per cent last year and, before Mr Gordhan’s sacking, was not expected to grow beyond 1 per cent this year.
If Moody’s ratings agency follows S&P and Fitch in downgrading South Africa’s sovereign debt to below investment grade there is a real chance of recession. Under their own rules many major international investors, such as pension funds, automatically have to sell government debt if two of the three main ratings agencies give a country junk status.
In addition, junk status is very difficult to reverse. Only six out of 20 countries have managed to get out of it in the past 30 years, according to Bloomberg. Those that have escaped have spent on average seven years doing so.
While Mr Zuma looks likely to survive an April 18 vote of no confidence, that will do nothing to cover the cracks that have almost become canyons in the ANC. “You could definitely say this is the tipping point,” says one ANC insider, requesting anonymity. “Those who hold the wealth there are going to have to face up to the fact that something has to change. Zuma has been elected on that mandate – like it or lump it.”
For 23 years South Africa, and the ANC in particular, has put off taking the difficult journey it is about to face. There are very many unknowns. What would be the impact of white capital fleeing the country? Will political instability turn into violence? Will banks be burnt down, elite white business targeted? How deep is the anger among the black population?
Or is there a middle ground that can be reached?
What is perhaps clearer is that the path South Africa has been on for the past two decades is unsustainable, with one side giving up one struggle to simply inherit another.
The new finance minister Malusi Gigaba faces some difficult choices. But there is one move that could be relatively simple and produce a desired result without pain.
He can break the monopoly of the “Big Four” banks by granting licences to new lenders set up to specifically to service the black majority. Many non-white businesses struggle for cash as they do not have collateral – such as homes or investments built up over generations. This means it is difficult for them to expand and in turn restricts growth and competition within the economy.
If Mr Gigaba takes this route he could begin to revive the South African economy with minimum strife and maximum gain.
business@thenational.ae
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