The biggest risk to South Africa right now, according to Absa

 ·28 Jul 2022

Banking group Absa has published its latest Quarterly Perspective for Q3/22, saying that against the backdrop of surging inflation, rising unemployment and an increasingly desperate factional battle for control within the ANC, the potential for civil unrest in South Africa has increased.

“The most worrying downside risk to our baseline forecast is the potential for another eruption of violent social unrest,” it said.

Peter Worthington, a senior macroeconomist at Absa, said that obstacles in the form of weak bureaucracy – that prevents aggressive reform – exposes big downside risks in the country.

He said Absa’s prediction for the future economy of South Africa is uncertain, and if the country can not have positive growth, the possibility of social unrest remains.

Last year’s unrest continues to take its toll on South Africa’s economic growth. The riots which broke out in KwaZulu Natal and parts of Gauteng in July 2021 saw over 350 people killed and thousands injured, leaving an economic cost of more than R50 billion in its wake.

Absa noted that the riots put a lot of pressure on government spending, with the South African Special Risk Insurance Association (SASRIA) paying out to cover business losses. The banks said that SASRIA now needs to be recapitalised.

Looking ahead, this upside pressure on spending still exists. After public sector wage increases and the likelihood of further bailouts for state-owned companies, the fragile socio-political situation which could lead to unrest is the third biggest risk to spending, Absa said.

“Quantifying the precise likelihood of such an event and its timing and scale is next to impossible, of course,” said Absa. However, it warned that the impact of unrest extends beyond the direct economic cost.

“Another downside event of this nature, after last July’s civil unrest, would dramatically set back investment, undermine the currency, stoke fiscal pressures and depress credit ratings,” the bank said.

Absa is not alone in sounding the alarm of unrest, with finance minister Enoch Godongwana warning earlier this month (14 July) that deteriorating service delivery at a municipal level is likely to lead to more instability and protest action in the country.

Godnongwana said that while much of the rioting in 2021 was undoubtedly driven by criminal elements, it found fertile ground in the desperate economic situation faced by many South Africans.

The finance minister’s sentiments were echoed by former president Thabo Mbeki who said that the government’s failure to address inequality, high levels of unemployment and improve the lives of the people of South Africa has led to growing frustration among the population.

“You can’t have so many people unemployed, so many people poor,” he said. “One day it’s going to explode.”

Professional services firm PwC. said that current economic conditions are worse than they were at the time of the 2021 riots, giving fertile ground for the a repeat of events.

“Both unemployment and inflation are higher at present compared to the levels seen during the July 2021 unrest. Furthermore, research by the Bureau for Economic Research shows that consumer expectations in Q1 2022 for their household finances were more positive compared to their outlook for the economy,” the group said in April.

“This mismatch between expected financial conditions and the ability of the economy to deliver on these expectations contributed to last year’s unrest. When considering all of these factors, as well as the upwards momentum in trade unions’ salary and wage expectations for 2022, there is enough reason to be concerned about social stability in South Africa.”

PwC added that the eventual introduction of a basic income grant – or similar cash transfer tool – could come too late to quell these social pressures.

Read: These 4 graphs show how South Africans are getting poorer

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