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11 June 2012 at 09:33 - Posted by Anonymous

The Zuma Rot


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Key political risks to watch in South Africa.

South Africa's ruling ANC is braced for a major policy conference this month after the top three international credit rating agencies said the party was sending Africa's largest economy down the wrong path.

The main concern of the African National Congress, in power since apartheid ended in 1994, is a leadership struggle that now looks set to be settled with President Jacob Zuma in position to control the party and country for the rest of this decade.

This scenario worries economists who feel his ineffectual leadership will allow problems to fester including a broken education system, an overly rigid labour market and rampant corruption, with risks mounting the longer he stays in power.

Meanwhile, the electric grid is operating on razor-thin margins, raising the possibility of rolling blackouts that could slow growth and cost the energy-hungry mining sector billions of dollars in lost output.

THE ZUMA ROT

Zuma's presidency has focused largely on an electoral conference at the end of the year where the ANC selects its leaders. If Zuma wins re-election as head of the party, he is assured of being its nominee in the 2014 presidential race and winning another five years in office.

To keep his grip on power, Zuma has become beholden to powerful labour federation COSATU and thousands of ANC supporters, many of whom appear to have pledged loyalty in return for skimming money from state coffers.

His courtship of COSATU has led to a raft of union-friendly legislation that has driven up personnel costs while doing little to counter chronic joblessness. The unemployment rate has crept up to 25 percent during his time in office.

Zuma and ANC leaders have made the fight against corruption a top priority but most in the country see their pledges as paying nothing more than lip service to a growing problem. Billions of dollars of state funds meant to help the impoverished majority are being siphoned off.

Zuma has also put before parliament legislation to manage state secrets. Critics say the measures, if passed, would set up a small cabal around the president who could sweep under the carpet harmful information on corruption and spy on its foes without seeking approval from the courts.

The government says the measures would help safeguard national security.

What to watch:

- Growing protests from the poor, angry at the government's shoddy performance. The protests could destabilise the ANC.

GROWING STATE CONTROL OF ECONOMY

The ANC will hold their top-level policy meeting at the end of June. The event is held every five years and is designed to determine the direction of the former liberation movement that now enjoys virtual one-party rule.

The ANC has released hundreds of pages of policy discussion documents showing its intention to have the state play a bigger role in guiding the economy.

Market players will be paying attention to recommendations in a policy paper on mineral resources calling for new taxes on mining firms in the world's largest platinum producer to help pay for welfare spending.

The plan would impose a "resource rent tax" - effectively a windfall levy - of 50 percent that will kick in after investors have made a "reasonable return".

Zuma has set aside billions of dollars for infrastructure spending to create jobs and grow the economy. But similar spending has seen billions lost to corruption, delays in construction and several projects never getting off the ground because of poor planning.

What to watch:

- Policy directions the ANC takes with mining, national health insurance and state-owned enterprises.

SLOWING CHINA, SLOUCHING EUROPE

Adding to policy woes at home are troubles in its two most important overseas partners - Chinaand Europe.

China is South Africa's biggest single trading partner and the main destination for its mineral exports. Signs of slowing growth in the Asian economy could translate into sluggish growth and job losses for South Africa.

The European Union, mired in debt woes, is South Africa's largest trading bloc partner. Europe is also the main destination for its exports of manufactured goods, a sector accounting for about 15 percent of South Africa's economy.

What to watch:

- Shock moves of the rand currency caused by a volatile euro.

ELECTRICITY

The near-collapse of the electric grid in 2008 forced mines and smelters to shut for days and deterred new mining and manufacturing investment. Electricity supply shortages still worry businesses and households.

State utility Eskom's capacity margin will remain thin until a massive new power plant comes on stream next year, but construction delays have raised worries on whether it will be operational as planned.

Large tariff increases over the next three years are helping Eskom plug its funding gap, but industry leaders complain the extra costs are likely to stifle growth.

What to watch:

- Blackouts caused by system overload may undermine Eskom's assertions that there will be no repeat of 2008, deterring long-term direct investment.

TOLL ROADS

The government may be stuck with a $3 billion bill to upgrade its busy highways in Johannesburgafter unprecedented protests and a court decision forced the state road agency SANRAL to suspend its tolling plans.

Without tolls rolling in, SANRAL may be forced to default on at least 20 billion rand ($2.4 billion) of debt unless the Finance Ministry steps in to pick up the tab. The bill is more than the country pays each year to run its court system.

Economists have warned if toll plans collapse, this could deter infrastructure investments, which use the same bond funding model as SANRAL.

What to watch:

- Greater difficulty for state-owned enterprises in raising funds through the bond market.

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