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South Africa—Recession and populism renew downgrade fears

Latest GDP figures show Africa’s most industrialised economy in recession for the first time since 2009—agriculture contracted 29% in Q2, owing to drought in the Western Cape. The ability to stimulate growth via rate cuts is stymied by the vulnerability of the rand, despite interest rates of 6.5% relative to inflation of 5.1%. Indeed, twin dExport Finance Australiaits in the current and fiscal account have seen the rand among the worst hit currencies in recent emerging market contagion.

Ongoing uncertainty resulting from the former President Zuma era has plagued the current administration’s economic decisions. And now recession will continue to impede the correction of low employment (Chart) and inequality, both of which stoke instability, and are likely to motivate voters in the 2019 national elections. Recession will also complicate Pretoria’s commitment to consolidate its finances—a precondition of maintaining its last investment grade rating from Moody’s. And while increased foreign investment is at the heart of President Ramaphosa’s plan for South Africa’s economic revival, investor sentiment is being frustrated by a proposed constitutional amendment on land expropriation without compensation. President Ramaphosa insists this is not an abrogation of property rights but would instead prescribe exactly when expropriation without compensation was justifiable. But despite strict limitations on applicability, uncertainty persists over the scale of land redistribution and the likelihood of future amendments. It is hoped that Ramaphosa’s Global Investment Summit in October 2018 will provide some clarity, including for Australian investors. Even with this challenging domestic and international environment, outbound investment from Australia to South Africa increased more than 40% in 2017.