South Africa's woes predate - and likely will long outlast - July's riots

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By Emerging Markets TeamEaton Vance Management

Boston - South Africa saw significant unrest in July, when former President Jacob Zuma turned himself in for a prison sentence of 15 months for ignoring a summons to appear in court on corruption allegations. In the riots and looting that ensued, at least 330 people died and over 2,500 people were arrested. Economic damage is estimated in the billions of dollars, well over 1% of GDP.

But long before Zuma's arrest, South Africa has struggled with growing fiscal deficits, rising government debt, crumbling infrastructure and disappointing growth, all of which were exacerbated by the COVID-19 pandemic. The former president still has a loyal group of followers, and the Ramaphosa government has blamed loyalists for the riots and uproar.

Ramaphosa's Reign

President Cyril Ramaphosa was elected by parliament in February 2018, after Zuma resigned over corruption allegations. The ANC won parliamentary elections in May 2019 but by a small margin of victory.

Ramaphosa has talked a lot about tackling corruption and making the country friendlier to investors but has shown very little action on reforms, even as fundamentals worsen. For example, the IMF says South Africa had a real GDP recession of 7% in 2020, and unemployment rose to a new record high of 32.6% in Q1 2021. The budget deficit for fiscal year 2020/2021 soared to 12.9% of GDP while public debt-to-GDP jumped to 82.5%.

To address the damage of the riots and implement a recently concluded wage agreement, the government has committed to new expenditures in the neighborhood of 1% of GDP. It remains unclear if elements of this package such as social aid grants will continue into coming budget years.

While COVID-19 has accelerated the problem, fiscal policy had already deteriorated significantly during Ramaphosa's presidency and shows no signs of structural improvement. Fundamental and political stability remains a concern for South Africa, and there is little to inspire confidence that its fiscal course will be meaningfully corrected anytime soon.

On August 5, Ramaphosa held a late-night press briefing and announced a somewhat surprising cabinet reshuffle in response to the riots and challenges that the country is facing. The president accepted the resignation of Finance Minister Mboweni and replaced him with Enoch Godongwana, a former trade unionist and Zuma-era deputy cabinet official.

Bottom line: The conditions that led to the week of riots in South Africa remain in place, with no change to the living conditions of South Africans, nor any prospect of material improvement. While tactical positions in beaten-down assets are always possible, the longer-term bullish story for the country remains as elusive as ever.