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Business Resilience in South Africa: Political Stability

This is the first of three posts exploring the business resilience challenges multinational corporations are likely to face when operating in South Africa over the next five years.

 

The political stability of South Africa hinges on the fractious nature of the ANC, which, despite all its faults, remains the most significant and enduring force in South African politics. 2021 may prove a defining year in the fate of South Africa as a destination for business and investment.

 

The African National Congress (ANC) is polling at a little over 50% of the national population and this level of support is likely to endure, or only marginally decrease, ahead of the next general election in 2024. The Democratic Alliance, as the official opposition, takes only 20%, and as a whole, the opposition parties represent too many divergent personal interests to be reconciled into an effective coalition. As a result, the ANC is, and will remain, the nucleus of national politics.


President Cyril Ramaphosa is an advocate of the importance of foreign direct investment and has made attempts to remove obstacles and policy uncertainty; however, his control of the ANC, of which he is the head, is precarious. This is most clearly demonstrated by his drive to fight corruption, which has pitted him against the faction associated with former president Jacob Zuma, under whom the tentacles of corruption are thought to have spread significantly. The Zuma faction, now represented by secretary general Ace Magashule, is commonly labelled the Radical Economic Transformation (RET) faction. It purports to stand for the interests of the majority of South Africans against ‘white monopoly capital,’ but acts exclusively to regain political power to ensure survival and the perpetuation of long-established patronage networks. The outcome of this division will determine whether a system of corruption and lack of transparency prevails, or if the conditions for a more enlightened and progressive business-friendly environment can grow.


Recent events indicate that the balance of power is moving in Ramaphosa’s favour. However, this will be contested, and the political instability caused by such factional disputes will continue for another 2-3 years until the 2024 general election.


In a scenario where the RET faction gains dominance within the ANC, the political environment would become more challenging for foreign-owned businesses. The state would further fail to deliver upon its core functions, public institutions may collapse, and the economy, which has already been downgraded to ‘junk status,’ would slide further as investment declines and operational risks to foreign-owned businesses increase. Nevertheless, in assessing these risks it is worth remembering that multinationals were able to continue operating in South Africa under the presidency of Jacob Zuma, where corruption was so widespread that it amounted to state capture. What will become increasingly important should the Ramaphosa faction be usurped, is thorough due diligence, particularly around major contracts, especially ESG assurance around the application of BEE laws.


A second, but connected threat to the ANC’s political stability, is posed by the self-described radical and militant economic emancipation movement - the Economic Freedom Fighters (the EFF). Julius Malema formed the EFF in 2013 after he was expelled from the ANC Youth League. With its radical policies which appeal to those who feel disappointed with the ANC, the EFF has since gained popular support among the young black population (reportedly, 70% of supporters are between the age of 18 – 34, and 97% of supporters are black). It is now the second-largest party in three out of the nine provinces in South Africa after grossing 10.7% of the vote in the 2019 national election.


If the appeal of the EFF’s economic radicalism and anti-white stance continues to grow in the wake of the fallout from COVID-19, the EFF’s upward trend will persist. This is most likely to occur at a local rather than national level and principally in metropolitan areas where the EFF has a staunch support base. The EFF’s rise in popularity would be at the expense of the ANC and, in the near term, could force the ANC to look to the EFF for coalition partners in municipalities following the outcomes of the upcoming local government elections in October. The consequences of this for foreign-owned businesses would be increased antagonism toward ‘white-owned’ businesses which could manifest in a variety of ways including xenophobic attacks, procurement difficulties, and civil unrest.


In the medium to longer-term, the force of the left-wing populism advocated by the EFF and the RET faction could result in the ANC assimilating the EFF into the party. A merger with the EFF would push the ANC to adopt more radical policies, such as the nationalisation of industries and expropriation without compensation. The ANC’s decision to prioritise the passing of legislation to allow for land expropriation already indicates a move in this direction.


The most serious risks for foreign-owned businesses of a dramatic political shift to the left would be the threats posed by expropriation without compensation and the nationalisation of industry. Even if the implementation of the laws stopped short of full expropriation, the business and regulatory environment would become increasingly hostile. For smaller businesses, especially those seen not to benefit black South Africans, the risk of expropriation would be real and this would have supply chain impacts for larger foreign-owned businesses. Moreover, the policies enacted by such an administration would likely promote African racial nationalism and protectionism at the expense of free trade and the employment rights of those outside that group.


The challenges South Africa faces to its political stability over the next five years mean that foreign-owned businesses investing and operating in the country will need to be agile and adaptable in order to respond to the volatile political environment.


The second post in this business resilience series will explore how the continued rise in organised and violent crime is driving risks for foreign-owned companies operating in South Africa.

 

Complexas provides bespoke advisory services and ESG assurance to global clients.

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