South Africa’s Path to Junk Status: A call to action

South Africa's Economic Crossroads

"After climbing a great hill, one only finds that there are many more hills to climb." Nelson Mandela's words ring grimly prophetic as South Africa faces its steepest economic ascent in decades.

The midnight announcement on March 30th 2017 of the country's fourth finance minister in two years triggered a predictable market rout. The rand plummeted, bonds and stocks sold off, the cost of insuring government debt against default rose, and South Africa's credit rating was downgraded to junk. The ruling African National Congress erupted in revolt.

The country now risks being delisted from major international bond indices. Meanwhile, crushing unemployment persists and growth has fallen well behind the rest of sub-Saharan Africa. The IMF projects a meagre 0.1% expansion in 2017, with per capita income falling to 2010 levels. Some 355,000 South Africans lost their jobs in the first quarter of 2016, pushing official unemployment to 26.7%. Violent protests over service delivery serve as constant reminders of mounting popular anger.

World Bank indicators show South African growth at least one-third lower than sub-Saharan Africa's 4.5% average, and far below emerging Asia's 8.1%. Since 2008, growth has stalled at just 1.5%.

The roots of stagnation

External shocks have played their part. China's economic rebalancing has reduced global demand for exports, while falling commodity prices have hit South African iron ore, coal and platinum. A punishing drought has battered agricultural output.

Yet domestic dysfunction bears much of the blame. Discontent with President Jacob Zuma has reached fever pitch. His sacking of Pravin Gordhan—South Africa's internationally respected finance minister—risks economic meltdown. Mr Zuma appears determined to demonstrate his primacy through a domestic power play and to make good on patronage promises. Mr Gordhan stood in the way as the finance ministry cracked down on corruption and cronyism.

The president calculates that while objections are loud, his opponents remain too divided to unite against him. He may prove correct, to South Africa's detriment. Foreign investors and domestic businesses have condemned his actions. Should South Africa become a default risk, a vicious cycle will follow: investors will flee, the rand—which has already lost half its value against the dollar since 2011—will fall further, and prices and interest rates will surge.

Structural sclerosis

Deeper structural problems compound the political turmoil. Infrastructure bottlenecks, workforce skills mismatches, and regulations that stifle competition keep one-third of the labour force unemployed or too discouraged to seek work. The cost of insufficient action has reached a critical inflection point.

Yet South Africa has made remarkable progress since its transition to democracy, nearly doubling GDP in real terms. Some 3.6m people have been lifted out of extreme poverty—halving the rate to 16.5% of the population. Access to infrastructure, education and healthcare has improved markedly, with social grants now benefiting over 16m people. South Africa remains a highly diversified economy with world-class companies, particularly in finance, where corporate governance ranks second in the World Economic Forum's rankings.

The big five opportunities

What might reignite progress? Five sectors could increase GDP growth by 1.1 percentage points annually, adding 1trn rand ($87bn) to GDP by 2030.

First, South Africa must leverage its skilled labour force to become a globally competitive manufacturing hub in automotive, industrial machinery and chemicals. Second, infrastructure productivity requires heavy investment in electricity, water and sanitation. A true public-private partnership must maximize existing assets and prioritize high-impact projects.

Electricity shortages have constrained growth. Despite new capacity, another shortfall is projected between 2025 and 2030. Natural gas plants—fast to build, with low capital costs and carbon footprint—can diversify the power supply.

Third, South Africa's service industries currently capture only 2% of sub-Saharan Africa's nearly 500bn-rand ($38bn) market for service imports. With the right investments, service exports to the region could soar.

Fourth, rising consumption of agricultural goods in sub-Saharan Africa and Asia offers South Africa an opportunity to triple agricultural exports by 2030, driving rural growth for the nearly one in ten South Africans who depend on subsistence or smallholder farming.

Fifth, preparing millions of young people for future jobs requires radically reshaping human capital development, particularly through massive expansion of vocational training programs.

The insider-outsider economy

A crucial structural divide persists between the included—large businesses, banks and unionized workers who maintain entry barriers—and small enterprises and the unemployed. Wage bargaining practices between big business and big labour serve established interests but bind entire sectors to agreements that present huge obstacles to small and medium-sized enterprises, which in other countries typically employ the most people.

The private sector has been coddled in ways that create privileged markets. Many South African companies enjoy high profit margins built upon barriers that hurt consumers and block competitors. This anti-competitive behavior pervades construction, farming and telecommunications. Government regulations often reinforce these practices through inefficiencies that limit enforcement.

State-owned enterprises pose severe challenges. Power utility Eskom plays a crucial role but suffers from inefficiencies, poor management and weak balance sheets. Even well-performing SOEs like Transnet create economy-wide problems: container-handling costs at South Africa's ports are 175% higher than the global average, raising export costs and constraining competitiveness.

The National Planning Commission decries high corruption levels. As the economic pie shrinks, more energy is spent fighting for larger slices rather than growing it. Counterproductive measures—such as recent restrictions on temporary employment and stricter visa requirements—have damaged investor confidence and the globally leading tourism industry.

A call for transformation

South Africa's core economic problems have not been tackled comprehensively. The primary goal must be re-energizing growth through inclusion and job creation. This requires filling infrastructure gaps, encouraging competition, reaching agreement on sensible labor-market policies, improving education and training, and insisting on better governance and intolerance of systemic graft.

These reforms must be undertaken with the same commitment that brought democratic change. What is needed is not tax cuts or spending increases, but fundamental, transformational reforms that boost employment, reduce inequality and promote economic inclusion.

This approach must focus not just on leveling the playing field but opening it up for individuals and businesses to thrive. Tackling vested interests and promoting a truly inclusive economy will require buy-in from all stakeholders and a long-term vision of their interests in a more dynamic and equitable South Africa. It will be how South Africa can build stronger, more inclusive growth and serve as a beacon of economic change, just as it once emerged as a model for political change.