1. The pandemic

The Omicron variant, uncovered by South African scientists, is the pandemic’s main show at the moment. The immediate response to its discovery was travel bans from the likes of the UK, dealing a body blow to South Africa’s battered tourist sector, which was hoping to get some Christmas cheer this year. The pace at which such restrictions are eased – making it easier for tourists from rich countries to visit South Africa – will be crucial to any recovery to the industry, which is labour-intensive and supports many small businesses.

The pace of the vaccine rollout is also critical. The fact that more than a third of the adult population is already vaccinated as the fourth wave gets rolling is the main reason why the government did not immediately reimpose new lockdown restrictions such as booze bans. Vaccines are keeping the economy open and the renewed drive to get jabs into arms will be supported by mandates, it seems as we went to press for this section in early December. The economy cannot afford more lockdowns and a fatigued population may not accept them against the backdrop of a state that can hardly enforce the law.

2. Eskom

When Eskom finally fails to make this list, it will surely be good news. Meanwhile, it remains the biggest risk to the economy after the pandemic. Load shedding takes its greatest toll on small businesses that cannot afford backup, but its impact is not limited to size. The more intense it is, the slower the economy grows.

Eskom’s inability to provide reliable power is also among South Africa’s biggest obstacles to foreign investment. Few overseas boardrooms, if any, are going to commit significant capital to a new factory, mine or smelter in an economy marred by frequent power shortages.

Compounding the problem is the fact that more than 80% of Eskom’s power generation comes from coal, a state of affairs that threatens the competitiveness of South African industry. Customers in key markets such as Europe will eventually stop buying South African products because of their carbon footprint. This will be in response to punitive tariffs, customer preference, and the drive by companies to reduce the carbon content across their value chain. In this regard, the lifting of the limit on self-generation projects to 100MW is welcome, as is the over $8-billion deal reached at COP26 to help finance South Africa’s green transition.

3. Commodity prices

South Africa’s economy is more exposed to the ups and downs of the commodities cycle than most. On the one hand, it is heavily reliant on crude imports – another reason to go green – while on the other, the export of minerals and metals is a key source of foreign revenue.

Oil prices almost doubled this year to more than $86 a barrel in October, a spectacular rebound after they collapsed in 2020. It’s hard to say where they will go from here, but a rebounding global economy is not a bad environment for oil prices. They have been a key driver of domestic and global inflation. If the oil price rally is maintained in the New Year, price pressures will be stoked further. But if the rally flags, inflation pressures will be reduced.

On the mining side of the equation, record platinum group metal (PGM) and iron ore prices this year flowed to the bottom line of producers, generating record profits and record surpluses on the current account. This, in turn, provided support for the rand and provided the Treasury with an unexpected windfall in additional tax revenue. Infrastructure drives in the US and China should help support commodity prices, while pent-up demand for automobiles may prove a catalyst for PGM prices.

4. State failure

Sadly, South Africa cannot take full advantage of the commodity cycle because of the failures of a state that some ANC mandarins still maintain with a straight face is “developmental”.

The failures on the state front are wide-ranging. State-owned Eskom’s failure to keep the lights on reliably is one, but many more reared their heads in 2021. Exxaro reduced its guidance for export sales by 35% because of “alarming” woes at Transnet Freight Rail (TFR). Meanwhile, the Department of Mineral Resources and Energy (DMRE) has allowed a massive backlog of mining rights applications to build up, thwarting all but the most serious investors.

In June, global mining giant Rio Tinto pulled the plug on its Richards Bay Minerals operation after the assassination of general manager Nico Swart in May, the culmination of a long list of violent incidents. Gold Fields solar power plant project at its South Deep mine has been targeted by a “procurement mafia”, an ominous sign as the mining industry has a pipeline of such projects that could unlock 2GW of renewable energy with investments ranging from R30- to R40-billion.

And the wave of riots and looting that shook Gauteng and KZN in July, hitting the economy like a sledgehammer, threw into sharp relief the inability of the South African state to contain social unrest. A failing state is simply not a magnet for investment.

5. Policy uncertainty

The only thing that is certain about the South African policy environment is uncertainty.

Take, for example, the never-ending confusion around the Mining Charter. The Pretoria High Court in September ruled that once a mining company is empowered, it is always empowered.

The mining industry argued that once a company has met the threshold for black ownership of 26% as laid out in previous charters, or 30% for new mining right applications, that holds — even if the empowerment-holders subsequently sell their stake. Case closed and time to move on.

But the DMRE has since signalled that it plans to ram legislation through to achieve its transformation agenda, and so foreign boardrooms have no idea if the investments they might make in South Africa’s mining sector won’t come with significant costs down the road if they have to give away equity stakes or sell them on the cheap.

“This is looking like investment uncertainty on steroids,” is how Paul Miller, director of mining consultancy AmaranthCX, described it.

Meanwhile, the Department of Forestry, Fisheries and the Environment (DFFE) has produced a policy paper based on a High Level Panel report on megafauna wildlife issues that has alarmed game farmers as it raises policy uncertainty around the sector. Will captive breeding operations for rhino, which have helped to add to the species’ numbers, be phased out? And what does that mean for current businesses and potential investors?

Debates around land expropriation without compensation are also never-ending and seemingly never resolved, throwing a pall of uncertainty over property rights. On other fronts, the roll-out of spectrum is unclear, as is the ability of municipal councils comprised of coalitions to deliver the basic government services the economy requires to function.

The presidency, the Treasury and others often speak about the urgent need for structural reforms, but the prospect of any of this happening is also “uncertain”. And one thing that investors detest is uncertainty – you can be certain of that. DM168