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Ripples from SA’s woes

The past two weeks in South Africa have made headlines on the global stage following the arrest of former president Jacob Zuma. Widespread looting, unrest and violence have rocked the KwaZulu-Natal and Gauteng provinces, bringing many businesses in South Africa to their knees.

Tafara Mtutu
Research analyst

A toxic concoction of a disdain for President Cyril Ramaphosa’s stringent lockdown restrictions and retaliation for Zuma’s arrest were the spark that torched the fire of what is possibly South Africa’s worst civil unrest since apartheid.

A preliminary report by the South African Property Owners Association (SAPOA) indicates that the unrest and violence caused extensive damage to 161 malls, 11 warehouses, eight factories, and 161 liquor outlets and distributors.

Approximately 3 000 stores were looted in the country and stock worth over R1,8 billion (US$123 million) was lost in Durban alone. Overall, the damage to the nation is estimated to be around R50 billion (US$3,4 billion) and this is largely concentrated in the KwaZulu-Natal and Gauteng provinces which collectively contribute about 55% to South Africa’s economy. Although R50 billion is less than 5% of South Africa’s 2020 GDP of c.US$300 billion and seems inconsequential, there are possible domino and ripple effects from these events that could cost South Africa and the Sadc region at large.

Further inequality: As South Africa picks up the pieces and counts the costs, one thing is becoming clear – unemployment figures and inequality will be on the rise.

As it stands, South Africa’s unemployment rate has deteriorated from 25,6% in 2011 to 32,6% in 2021 and this figure is likely to rise even further in the year as Statistics South Africa quantifies the magnitude of the damage.

Many business owners whose premises were looted and damaged will struggle to find their feet, while some mull permanent closure vis-a-vis the existing and extensive pandemic-driven challenges since last year.

Statistics from various business councils also show that 70% of small businesses affected are black-owned, and this holds dire implications for South Africa’s Gini coefficient, which is already the highest in the world. The closure of these businesses will likely ripple into the disposable incomes of many South Africans and plunge them into deeper inequality.

A mass exodus of capital: South Africa is among the few emerging economies on the African continent in the purview of international investors.

However, this stunt follows other incidences that have affected the country’s Ease of Doing Business ranking and shaken emerging markets investors.

In 2015, the rand fell past R16 to the United States dollar after Zuma’s replacement of former Finance minister Nhlanhla Nene with David Van Rooyen.

In 2016, it was the Gupta family and their alleged abuse of state resources. In 2017, it was the Steinhoff saga and the country’s downgrade by ratings agencies S&P, Moody’s and Fitch Global. In 2018, it was the land expropriation without compensation Bill, and in 2019 it was xenophobia.

It is no surprise that the country has been experiencing an exodus of its high net-worth individuals because of these incidents that have proved to be more perennial than anything else.

According to Credit Suisse’s 2020 Global Wealth Report, South Africa was among the top five countries in the world that lost the most millionaires between 2019 and 2020. These events have inadvertently come at a cost to suppliers of capital who have responded by divesting from the country and potentially straining South Africa’s post-Covid-19 recovery prospects.

Trade in Sadc: South Africa is the major trade partner of many sub-Saharan African countries. A disruption of trade flows is likely to impact the many countries that are dependent on Africa’s most industrialised nation.

The rainbow nation accounts for the largest share of the import bill of Botswana, Mozambique, Namibia, Zimbabwe, Lesotho, eSwatini and Zambia. A decline in supply of goods could drive prices of the few available goods upwards, and result in inflation in both South Africa and the Sadc countries mentioned above.

However, the extent and persistence of these shortages remains to be determined.

Zimbabwe could experience:

a shortage of goods that have no substitutes,

an increase in the visibility of local brands, and

inflationary pressures. Using basic economic laws of supply and demand, the destruction of South Africa’s productive assets could lower the supply of goods for local consumption and exports, which could present inflationary pressures in Zimbabwe and the Sadc.

Even if Zimbabwe could manufacture these products locally, many of its products remain uncompetitive compared to those produced by South Africa because of a low Gross Fixed Capital Formation figure over the years and a strong currency. As a result, these local brands could turn out to be more expensive to produce and subsequently present upward inflationary pressures in Zimbabwe, at least until South Africa recovers and supply chain disruptions are addressed.

On the ZSE, Axia is likely to take a knock through its Distribution Group Africa (DGA) subsidiary. DGA is an importer of many non-discretionary consumer goods that end up in mass market retail stores in Zimbabwe, Malawi, and Zambia.

Listed mass market retailers OK Zimbabwe and Meikles (through Pick n Pay) could also experience constrained sales volumes in their current quarters because of the unrest in South Africa.

However, we note the overall improvement in disposable incomes in Zimbabwe compared to the prior year which will likely offset the impact of SA-related supply chain disruptions.

Mtutu is a research analyst at Morgan & Co. — tafara@morganzim.com or +263 774 795 854.

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