In July, social unrest erupted in Gauteng and KwaZulu-Natal, triggered by outraged supporters of former South Africa President Jacob Zuma, who was jailed on July 8 on contempt-of-court charges. The violence was the country’s most destructive since the end of apartheid in the early 1990s. On August 5, President Cyril Ramaphosa announced a cabinet reshuffle. Key changes include a new finance minister, Enoch Godongwana—tasked with stabilizing the country’s weak public finances—and a new health minister, Joe Phaahla. Meanwhile, power shortages continue to affect the economy; during H1 2021, electricity generated by Eskom, the state-owned energy utility, slumped to the second-lowest level since 2015. 

Our View

Although unrest is unlikely to be repeated on the same scale because of a strengthened security presence, Ramaphosa’s recently acquired political capital (following the suspension of his nemesis and anti-reformist Ace Magashule in May) has shrunk. The president’s pro-business economic reforms are now expected to lose momentum because of his perceived lack of authority over the country’s security, and because he will now prioritize rebuilding cohesion within the ANC ahead of local elections scheduled for October. Therefore, new (painful but necessary) economic reforms, such as privatization of state-owned enterprises and anti-corruption measures, could be postponed. Civil service wage cuts—previously the government’s main tool for slashing the budget deficit—will be replaced by tax hikes. Furthermore, the destruction of infrastructure and businesses in July means the economy is expected to contract in QOQ terms in Q3 this year. Consequently, FrontierView has revised down South Africa’s 2021 GDP growth forecast from 3% YOY to 2.8% YOY. Weaker prospects for foreign direct sentiment, public finances, and job creation have prompted FrontierView to also reduce its annual average GDP growth forecasts from 1.9% YOY to 1.7% YOY over 2022–2025. 

Business Implications

MNCs should plan for subdued private sector sentiment as businesses reel from July’s social unrest. Companies selling to consumers in Gauteng and KwaZulu-Natal, and those reliant on logistics infrastructure in Durban will face weak demand and higher distribution costs over the coming months. Meanwhile, all MNCs operating across the country should plan for tax increases that could squeeze local partner margins and curtail customer spending power. These could take the form of explicit tax hikes or new stealth taxes, such as the proposed 12% social welfare fund levy on personal incomes. Such taxes on incomes are more likely than increases to corporation taxes, because the government will aim to avoid further dampening business sentiment, while hikes to consumptions taxes (such as VAT) will be minimized, because they are regressive in nature. In this environment, MNCs should consider targeting customers operating in well-performing industries, such as mining, IT, telecom, and agriculture, while focusing on growing market share by doubling down on priority customers.

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