Finance

Mandela and Mbeki’s economic progress crushed by Zuma and Ramaphosa

Presidents of South Africa

Presidents Nelson Mandela and Thabo Mbeki did exceptional work to fix the broken economy they inherited, but Jacob Zuma and Cyril Ramaphosa destroyed all this great work.

To understand the South African economy over the last 30 years, you have to go back to the early 1990s when the country was transitioning to a democracy.

Before the country’s first democratic elections in 1994, South Africa’s economic growth rates were declining.

Between 1985 and 1990, the economy’s annual average growth rate was 1.0%. It fell further to 0.2% between 1990 and 1994.

The country was battling rising debt and a weakening currency. Simply put, South Africa was heading for bankruptcy and needed urgent economic interventions.

The International Monetary Fund president visited South Africa following its democratic transition and offered the country funding.

Mandela did not accept the offer. “The difficulty with you is that you impose conditions which violate the sovereignty of a country,” he said.

Instead, President Mandela and Deputy President Mbeki focussed on implementing a coherent growth and development strategy.

Their plan was to gradually reduce the fiscal deficit, avoid a debt trap, and limit any real increase in recurrent government expenditure.

The Mandela presidency was able to stabilise the country’s finances and achieve an average economic growth rate of 3.0% between 1994 and 2000.

It created a solid foundation for future growth, which was achieved after Mbeki took over the presidency from Mandela.

Under Mbeki, with Trevor Manuel as Finance Minister, the country achieved strong economic growth and significantly reduced its debt-to-GDP ratio.

Things changed quickly after Jacob Zuma dethroned Mbeki as ANC President. Pravin Gordhan took over from Manuel as Finance Minister, after which government spending spiked.

South Africa’s strong GDP growth during the Mbeki era stopped, and the country’s debt rapidly increased.

The trend accelerated under Cyril Ramaphosa’s presidency, with many economists warning that South Africa is facing a fiscal cliff.

The country’s fiscal deficit this year will be around 6% of GDP. This means that South Africa’s debt-to-GDP ratio for the current financial year will increase to over 75%.

Renowned economist Dawie Roodt said the increased debt burden is becoming a major problem because the debt must be serviced.

Investors are increasingly concerned about South Africa’s fiscal outlook, pushing the government yield curve near its steepest in a year.

The National Treasury proposed drastic steps to rein in spending to avoid a debt trap, but it faces significant resistance from the left-leaning and socialist Tripartite Alliance.

Trade unions have called for strikes over the proposed budget cuts by the National Treasury, and the government seems to follow their lead.

It leaves South Africa in a dismal position. “I am afraid we are heading towards serious financial problems in South Africa,” Roodt said.

These financial problems will have big implications for the rand, inflation, long bond prices, and economic growth.

The charts below show how South Africa’s economy and fiscal position improved under Mandela and Mbeki, which Zuma and Ramaphosa then undid.

Newsletter

Top JSE indices

1D
1M
6M
1Y
5Y
MAX
 
 
 
 
 
 
 
 
 
 
 
 

Comments