“This is politics. I know how it works. They can bring it on.” These were the words of Ace Magashule, a top official of the ruling African National Congress (ANC) party, after he was summoned to court to face 21 charges of corruption and fraud in November.
The secretary general of the ANC, a close ally of former president Jacob Zuma, was accused of corruption relating to a $16m contract to audit houses with asbestos roofs while he was premier of the Free State in 2014. The case has dominated South African news over the past few months as observers and investors wait to see if President Cyril Ramaphosa will make good on his election pledge to crack down on corruption within the party.
Though a report by the ANC’s integrity commission recommended that Magashule should step aside, the embattled secretary general has kept quiet on whether he will do so if asked by the party. The 61-year-old heads to court again in February.
Not only is Magashule’s trial one of most high-profile cases in South Africa’s history but it highlights growing ideological differences in the ANC.
Magashule represents a cohort that would like to deepen South Africa’s leftist approach to politics and the economy, doubling down on nationalisation and tough legislation like labour laws that critcs say deter foreign investment. Ramaphosa’s faction, on the other hand, is pushing for a free-market model and would like to reform state-owned enterprises and regulation that hinders economic growth.
“The ANC has been fractured since 2007 when Jacob Zuma won the leadership battle. There was no ideological cohesion. You had the Communist Party; you had the Congress of South African Trade Unions (COSATU) and you had the ANC Youth League. Zuma promised everything to everyone, and then those cracks started to emerge,” says Ronak Gopaldas, director at Signal Risk.
“The ANC does not know what it wants to be. It wants to be a player in the modern global economy but then it is also moving towards the more statist and nationalist model. This is where the dilemma comes in.”
Battle over reforms
The latest battle between the two sides comes as finance minister Tito Mboweni struggles to close a budget deficit predicted at 14.6% of GDP in 2020/21 as a result of what began as one of the world’s strictest Covid-19 lockdowns.
The disruption led the United Nations Development Programme (UNDP) to predict the country’s GDP could decline by as much as 7.9% in 2020. The unemployment rate hit an all-time high of 30.8% in the third quarter of 2020.
At time of writing, South Africa is facing its worst spike in coronavirus cases since the pandemic began. The surge is being driven by a new mutant strain of the virus which emerged in the country and spreads much faster, according to health officials. The president closed land borders in January and extended Covid-19 restrictions saying, “the pandemic in our country is now at its most devastating”.
However, Mboweni’s proposal to cut public wages by $10.4bn – 25% of the 2019-20 total – over the next three years has been met with fierce opposition from trade unions. South Africa spends around a third of its budget on civil servant salaries, which have more than tripled since 2007.
A decision by the Labour Appeal Court in December that it would be unlawful for trade unions to enforce wage increases that were due to come into force in April 2020 was a major boost for Mboweni and positive news for investors.
The finance minister is also sceptical of those who argue that South Africa should rescue and resurrect its national carrier, South African Airways (SAA), which is drowning in debt after years of corruption and mismanagement. “Do we need a national airline? Maybe that’s the question?” he wrote on Twitter.
After months of battling over the future of SAA and the potential involvement of new private investors, Mboweni agreed on a $685m bailout in October.
Chiedza Madzima, head of operational risk at Fitch Solutions, says it is the “left leaning factions” who want to keep the airline and other state-owned enterprises afloat due to the large number of South Africans on the payroll. Laws that were introduced to boost inclusive growth after the end of apartheid have brought wealth to thousands of citizens but are seen by some to deter investment.
“The issue with South Africa’s labour regulations is that it is too hard for companies to hire and fire workers, with court labour tribunals and the huge political influence of the unions in government,” says Madzima.
In 2018, Ramaphosa launched a drive to bring $100bn worth of investment into the country within five years. Following three annual investment conferences, South Africa has attracted around $47bn.
The latest conference in November saw $7.1bn worth of investment in sectors ranging from technology to infrastructure. The amount is around a third smaller than the two previous editions, a decrease the president has attributed to the effects of Covid-19.
However, Jacko Maree, investment envoy and non-executive advisor to Standard Bank, believes that South Africa’s ability to attract billions of dollars during a pandemic is testament to how investors continue to find the country attractive.
Around 80% of foreign fixed investment in South Africa currently comes from Europe and the UK. Maree expects this trend to continue while predicting that the US will step up its activities in Africa and especially South Africa under a new administration.
Sectors that are particularly attractive include renewable energy, infrastructure and technology. The banking system is by far the most developed in Africa and South African banks tower over continental equivalents in both assets and customers.
Peter Taylor, CEO at Citi South Africa, says that he has seen strong interest from global corporates looking for decent returns in South Africa while interest rates in the West are at an all-time low. He adds that top tier South African corporates have approached Citi to engage in “cross-border activities” throughout the rest of Africa.
The IMF expects that the country will grow by 3% this year after last year’s severe contraction. But any new investments could be delayed by the country’s pandemic woes.
In late January, US President Joe Biden imposed a ban on most non-US citizens who have recently been in the country, and the South African government has been accused by scientists, medics and labour of being too slow in rolling out vaccines.
Ramaphosa says the country has secured 20m vaccine doses, due to be delivered in the first half of 2021, but experts say there’s no detailed timeline for a vaccination programme. The president has defended his plans, pointing to unprecedented global demand and tough negotiations.
Mining sector lags behind
Covid-19 may continue to disrupt the mining sector, which is suffering from a chronic lack of investment despite a recovery in global prices. Despite South Africa’s vast mineral wealth – it holds around 70% of the world’s known gold reserves and sizeable reserves of diamonds, platinum, manganese and titanium – there has been a notable lack of exploration in the sector.
“People are investing in the DRC but why aren’t they investing here in South Africa?” asks Leon Louw, a mining expert based in Johannesburg. “We’ve got the infrastructure – there should be no reason why they are not.”
Along with environmental concerns and the lack of cheap and reliable power, regulation is again an issue. The Mining Charter legislates that mining companies must have a minimum of 30% black shareholders. Although this redistributes wealth to local South Africans, critics say the legislation hinders foreign investment and industry figures argue that the government should find a less obstructive way to ensure community participation and wealth creation.
“It’s not a lack of resources,” says Louw. “If we can get our regulations right then we would do much better.”
Read more on South Africa in our special report: South Africa – eyes on the future but mired in the present