The Leader Who Caused a Slump: Zuma Blamed for South Africa Mess

JOHANNESBURG (Capital Markets in Africa) – The last time South Africa fell into recession, in 2009, it was because of the global financial crisis. This time around, economists and business executives agree, the cause is a person: the president.

Jacob Zuma’s erratic political moves are breeding policy uncertainty and reluctance to invest, helping explain why the economy of the continent’s most industrialized nation contracted for a second straight quarter in the three months through March. Finance, real estate and business services shrank for the first time since the second quarter of 2009.

Business confidence has yet to recover after falling to a more than three-decade low in September and the rand has been the world’s most volatile currency in the past year. All the while, Zuma was waging a battle with Finance Minister Pravin Gordhan over how to manage the economy—until he fired him. 

Companies across industries say the political and economic instability is cutting sales, hurting profit forecasts and even inducing consumers to gamble less.

“There is no other factor to explain the recession,” said Iraj Abedian, Chief Executive Officer at Pan-African Investments and Research Services in Johannesburg. “The only factor is the political shenanigans, policy uncertainty and the lack of leadership, which has hollowed out confidence both in the consumer and the investment community.”

Gordhan, who had been driving efforts to trim the budget deficit, improve state firms’ performance and ward off junk credit ratings, was canned in a March 31 cabinet shuffle, prompting two ratings downgrades to non-investment levels within a week and nationwide demonstrations.

Pioneer Food Group Ltd. said it ended talks about a potential transaction because of the downgrades. Since April last year, companies including Old Mutual Plc, the continent’s largest insurer and which has a 173-year history in South Africa, packaging maker Nampak Ltd. and retailers including clothing and home furnishings specialist The Foschini Group Ltd. and Dis-Chem Pharmacies Ltd., have warned that the political situation is clouding economic prospects.

“There’s been a massive loss of confidence,” Graham O’Connor, the CEO of Spar Group Ltd., a food and liquor retailer with more than 2,000 outlets in southern Africa, said by phone. “All of us are disappointed by the firing of Gordhan, and the cabinet reshuffle just breeds uncertainty and that’s not what we want.”

Zuma spokesman Bongani Ngqulunga said that while other countries too have been struggling for growth and recovery from the financial crisis, there’s little room for fiscal and monetary policy to support growth. South Africa’s focus is structural reform, he said.

“Reforms usually challenge the status quo and are necessary to change the structure of the economy,” he said in a text message. “There is very little doubt that once the reforms process is complete our economy will be set on a higher growth trajectory.”

Companies were less optimistic. The “volatile socio-political outlook” will create more difficult trading conditions, and, because many government departments and state-owned enterprises are in flux, “the finalizing and closing of contracts is challenging,” Bidvest Group Ltd., which employs 114,000 people across its automotive, services and freight businesses, said June 8.

Signs of improvement in the economy were “washed away” by March’s political events, Massmart Ltd., the retailer controlled by Wal-Mart Stores Inc., said March 25, noting the “unfavorable impact on sales” of discretionary products.

Nedbank Ltd., a lender controlled by Old Mutual, plans to reduce its full-year earnings forecasts, citing slower-than-expected revenue growth in the first quarter caused by the weak socio-political and macroeconomic environment, it said.

People are so discouraged they’re even cutting back on wagering, said Marcel von Aulock, CEO of Tsogo Sun Ltd., the continent’s biggest gaming and hotel company and owner of  the Montecasino and Gold Reef City entertainment complexes in Johannesburg.

“April was very tough,” Von Aulock said by phone, adding that the biggest impact was at casinos, where fewer people came to gamble. “We put a lot of that down to a change in sentiment in the South African economy—everyone in South Africa got miserable.”

Fewer of them had jobs, too: Unemployment rose to a 14-year high of 27.7 percent in the first quarter. South Africa’s growth slowed to 0.3 percent last year, the lowest rate since 2009, after low commodity prices, the effects of the 2015 drought and weak demand for locally made goods weighed on output.

The country is likely to miss its 1.3 percent growth target this year and may have to curb spending to stick to its budget framework, Finance Minister Malusi Gigaba said June 15. This despite growth in agriculture, which is improving as the country recovers from the 2015 drought. Commodities, the nation’s biggest export, are seeing rising prices, but neither was enough to prevent the downturn. 

Zuma, who’s due to step down as leader of the ruling African National Congress in December and whose term as the nation’s president ends in 2019, has survived a series of corruption scandals and presided over the party’s worst electoral performance since the end of apartheid in 1994 in municipal elections in August.

In November, the graft ombudsman implicated Zuma in unethical conduct in a 355-page report about how the Gupta brothers, who are his friends and are in business with his sons, influenced his cabinet appointments and contracts at state companies such as power utility Eskom Holdings SOC Ltd.

Zuma, who has defeated numerous efforts to get him to step down, now is facing a no-confidence motion called by opposition parties in parliament. The United Democratic Movement has asked the Constitutional Court to order a secret ballot, which it hopes will enable lawmakers for Zuma’s ANC, who occupy 62 percent of the 400 seats in the National Assembly, to vote against the president without fear of losing their jobs.

“Zuma being replaced sooner rather than later will certainly help rebuild the confidence needed to turn the economy into a positive direction,” Ivor Sarakinsky, a senior lecturer at the University of the Witwatersrand’s School of Governance in Johannesburg, said by phone June 13. “Investors just aren’t going to bring in money in under this kind of uncertainty.”

Source: Bloomberg Business News