Emerging Markets

South Africa’s political woes couldn’t come at a worse time for its troubled economy, analysts say


South African president Jacob Zuma
Justin Sullivan | Getty Images

South Africa, once a standout emerging market economy, is caught in the middle of a political hurricane that's adding impetus to a downward economic spiral.

A week after chaos erupted at his annual speech—which resulted in soldiers having to be summoned to parliament—President Jacob Zuma appears increasingly isolated politically. A growing number of investors say that is proving to be a distraction from what requires Zuma's urgent attention, namely the economy.

Zuma's political turmoil is taking place against a backdrop of sky-high unemployment, stagnant growth and a credit rating dancing on the edge of junk. Since last year, Zuma's government has pulled out all the stops to avert a possible downgrade, but the country's turbulent politics have complicated his task.

With the South African Reserve Bank (SARB) schedule to meet next on March 30th, market analysts are widely expecting the central bank to keep rates at 7 percent, in order to help curb higher-than-expected inflation.

"South Africa's economy is looking weak at best," Clayton Fresk, a portfolio manager at Stadion Money Management told CNBC in an interview. "Growth has been on a steady decline since the end of 2010 while unemployment continues to hover around 25 percent."

The country's banking sector is also under pressure, as the number of over-extended consumers rise and investors remain on the sidelines. Low economic growth across the country, coupled with high household leverage remain a persistent risk for the country's banks, according to S&P Global Market Intelligence.


South African President Jacob Zuma
Christopher Furlong | Getty Images

S&P Global expects economic growth in South Africa to improve to a modest 1.4 percent, up from a near lifeless 0.5 percent performance in 2016.

At the same time, the justification for rate hikes that would normally lure investors in search of higher returns is diminishing. Price pressures are running above the comfort zone of the SARB.

"As a result, we expect the downside risks will continue to lie dormant for the domestic banking sector," Matthew D. Pirnie, a Johannesburg-based credit analyst with S&P Global wrote in a note to clients recently.

There are a few bright spots, analysts say. South Africa "is much less commodity-dependent that other large African economies such as Egypt and Nigeria," according to Stadion's Fresk. Meanwhile, the rand—South Africa's official currency—surged to its highest level in more than a year after inflation data beat expectations.

Still, Fresk told CNBC the country's overall situation remains "dire," a sentiment echoed by other observers troubled by Zuma's weakened political clout.

Domestic political tensions are expected to remain high this year, as Zuma's African National Congress (ANC) heads toward its leadership conference in December. That is when a successor will be chosen ahead of general elections in 2019.

"We expect the leadership and policy status quo to remain intact until then, with Zuma holding on as ANC head and President," Maya Senussi, a London-based senior economist with research firm 4CAST-RGE.

"That said, there is a possibility of a cabinet reshuffle, with the respected finance minister, Pravin Gordhan a potential…victim," she added—an outcome that would be damaging for growth and investment.