World Economy

S. Africa Problems Multiply

S. Africa Problems MultiplyS. Africa Problems Multiply

South Africa used to exhibit the hallmarks of a strong emerging market: stable politics, sustainable growth, good management teams at companies plus a ticket to the last frontier: corporate Africa.

Times have changed. Its national politics are becoming increasingly messy, growth has declined, corruption has increased and its structural economic problems remain largely unresolved, Money Observer reported.

Although apartheid ended more than 20 years ago, South Africa still suffers from the emerging world’s highest Gini co-efficient, indicating severe income inequality, which is compounded by the largest unemployment rate and worst incidence of HIV.

The creation of Black Economic Empowerment structures has not achieved a balanced redistribution of wealth while also increasing the fear of dilution among investors, particularly those exposed to the mining sector.

  Plagued by Corruption

South Africa is seen by some as a social time bomb and many locals prefer to invest abroad. Corruption has spread beyond state-owned enterprises and seems to be infecting the highest echelons of politics.

Attempts to reestablish proper standards are prompting investigations of the reformers themselves, such as the one recently started by the Directorate for Priority Crime Investigation against new Finance Minister Pravin Gordhan.

Investors have witnessed these strong-arm tactics in countries such as Russia, Venezuela, Turkey and China, but are not used to seeing them in South Africa.

The country risks losing its investment-grade credit rating due to its twin deficits and slowing growth. At present, the risk of a balance of payments crisis is low as the country has little foreign-currency debt and a favorable maturity structure.

However, as foreign investors own a considerable level of the local debt and stock markets, portfolio flows are vital to funding the current-account deficit—another situation that ratings agencies will view in a negative light.