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Corruption and one company are destroying the whole country

5 Nov 2019 17:39|Marcin Lipka

"The tremendous unemployment, the gigantic deficit in the public finance sector and the lack of growth perspectives for GDP result in the disastrous economic situation in the Republic of South Africa. On top of that, there is the terrible condition of the power infrastructure, causing power cuts and drainage of the already empty state budget," writes Marcin Lipka, Conotoxia Senior Analyst.

This year it has been 25 years since the abolition of apartheid in South Africa and 30 years since the legalization of the African National Congress (ANC), which has governed the country for the last quarter of a century.

The abolishment of racial segregation and the inclusion of the black population in the public economic and social life are the unquestionable achievements of Nelson Mandela and his staff. However, the last decade has been marked with a series of failures, especially in the economic context.

Unemployment and inequality are the highest in the world

The scale of the economic disaster in South Africa can be measured very quickly by the labour market alone. According to official statistics (Stats SA), unemployment in the third quarter of this year reached 29.1%, which is the highest level in 16 years.

But unemployment itself does not give the whole picture of the scale of the problems. 6.7 million people are actively looking for a job, but another 15.5 million people aged 15-64 are professionally inactive. As a result, out of the population of the working-age of 38.5 million (South Africa has about 58 million inhabitants), only 16.3 million people are employed, i.e., 42.4%. For comparison, the employment rate in some developed countries reaches even 80%.

The deeper we go into the data of Stats SA, the more problems are growing. Unemployment among young people (15-24 years old) is 58.2%, and employment among this age group barely exceeds 10%. In Australia or the Netherlands, it is over 60%, i.e., six times more than in the Republic of South Africa.

The income inequalities in the south of the African continent are extreme. In EU countries, 20% of people with the highest earnings have 4-5 times more income than 20% with the lowest income, in Latin America this rate reaches 10 times - according to OECD data, while in South Africa it is more than 37%. South Africa is probably the worst affected country in the world, both in terms of the labour market and the dramatic difference in living standards between citizens.

Gold, diamonds and platinum are not enough

Although South Africa is one of the world's major gold, diamond and platinum miners and producers (the export of these products is approximately 30 billion USD annually — data from The Observatory of Economic Complexity), the sale of valuable raw materials does not help the whole country much.

The inefficiency of other sectors of the economy, the necessity to support the economically inactive and the deep-rooted corruption are causing the deficit to crack. Moody's estimates that the gap in national finances will reach 6.0-6.5% of GDP this and in the next two years, while the public debt will increase from 57% to 70% of GDP in 2022.

In its report from the beginning of November this year, the credit rating agency revised downward its medium-term growth prospects to 1-1.5% (lack of structural reforms) from the previous 2.5-3%. Given the growing population, GDP per capita will practically remain stagnant.

In addition to income inequalities, unemployment and the disastrous situation of the budget, there is another issue that draws attention. The end of racial segregation was supposed to make education accessible to all citizens. What is reality? Among the rich in society, whose children attended the eighth grade in 2004, 16% received a university diploma. Under the same conditions for young people from low-income families, the percentage was only 1%. - according to the analysis of the "Young South Africans Chafe Under the Party Mandela Built" in "The Wall Street Journal."

Lack of electricity

As if all that weren't enough, South Africa plunges into darkness... The first serious problem with electricity occurred over a decade ago. Then, during the boom in the raw materials market (e.g., platinum), electricity supply problems in South Africa contributed to the lower production of this metal and, as a result, to the highest prices of platinum.

In 2010, the striking employees of energy companies threatened to block the football World Cup. In the following years, the supply of electricity to the largest consumers, and then to households, was limited. The past months, especially March of this year, when the country was in a few days' blackouts, caused significant losses in the mining sector, resulting in the largest decline in GDP since the crisis in 2009 (by 3.1% in terms of annualized terms).

Energy company debt as a state debt

The situation of Escom is an integral part of almost every analysis of the Republic of South Africa. The largest power company in the continent is responsible for practically all electricity production in the country and half of Africa. It employs around 45,000 people, and besides generating energy, it also provides transmission and distribution services.

On Tuesday, Moody's downgraded Eskom's rating further to junk bonds (from B2 to B3), arguing that the state-owned company has very high debt (450 billion ZAR, or about 30 billion USD). The company also faces "weak liquidity" combined with "limited revenue growth opportunities due to low demand for electricity and tariffs that do not sufficiently support Eskom's finances in terms of operational and investment spending."

Moody's estimates that Eskom is not getting payments from the local authorities, its power generation is inefficient and the investments in two power plants, which were previously launched, are facing further delays and cost increases. In the next three years alone, the South African government aims to recapitalize Eskom with 138 billion ZAR, or more than 9 billion USD. As a result, Moody's rating of Eskom's debt increases by 7.5%, the estimated level of domestic debt to GDP by 2022. Together with other state-owned companies, this could lead to an 80% share of GDP in three years.

Corruption has destroyed South Africa

What really contributes to most of South Africa's troubles? First of all, corruption and vague relations between the authorities and the business. All the crucial governance indicators have dramatically declined in recent years (corruption control, administrative efficiency, the rule of law, quality of regulation). Corruption is also at the top of the list of factors holding back South Africa's development in every study by major international institutions (e.g., the IMF).

Poor management of state property and corruption are also clearly targeted by the new South African authorities. Cyril Ramaphosa, the country's leader for less than two years, has now reviewed the failures of former South African President Jacob Zuma. Ramaphosa said at the Financial Times Africa Summit in London in mid-October that Zuma's governments could have cost the country "more than 500 billion ZAR". Some suggest that it could have even been 1 trillion ZAR.

The analysts quoted by "FT" believe it could be even worse. They claim that under the reign of the Zuma, in addition to the direct costs of corruption, the nation lost between 1 and 1.5 trillion ZAR (between 66 and 100 billion USD) in the form of lost tax revenues and lack of foreign investment. The latter amount is about half of South Africa's total public sector debt.

5 Nov 2019 17:39|Marcin Lipka

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