The Pulse: Fall 2015

The Pulse is a special background brief by Shared Interest’s Executive Director for key investors and other stakeholders on recent developments in South and Southern Africa that impact the organization’s work. This is the first report.

Progress and Headwinds

As Shared Interest celebrates a year of success in strengthening the platform for equitable development at the levels of South Africa’s grassroots communities as well as financial institutions, the nation itself faces some significant headwinds. Last week the confidence of international financial markets was shaken when President Zuma fired Finance Minister Nhlanhla Nene, replaced him with the untested Des Van Rooyen, and — four days later — named former Finance Minister Pravin Gordhan to the post. The turmoil sent the rand into a slide from 15 to 16 to the US Dollar, although it restabilized with Gordhan’s appointment, moved Moody’s to question the country’s ability manage its budget, and Fitch to downgrade South African debt to BBB — the lowest level investment grade rating.

More troubling than the rapid changes were speculations about the political motives behind them. Nene had not supported a nuclear power deal that the Energy Department had priced at R600B, but that Treasury predicted could cost as much as R1.4T including potential cost overruns. (This is approximately the size of this year’s total South African budget.) Nene had also declined to support the restructuring of a South African Airways deal with Airbus, backed by the President, on the grounds that it risked saddling the government with more onerous debt terms. Gordhan, known for his spending discipline, has said that while the bidding process for the nuclear power stations is likely to go forward, no contracts will be awarded until money is found to pay for them. It leaves him — and the South African government — with the challenge of inspiring domestic and international confidence in the stability of government policy to address economic and financial challenges — including maintaining the stability of the rand.

The stakes are high for an economy hard pressed to continue to roll out a development agenda in a low-growth environment. This is especially worrisome if the country’s credit ratings decline, forcing South Africa to borrow at a higher cost for infrastructure and other projects, and if the rand continues its devaluation. Many small enterprises and farms are hit particularly hard by a falling rand, which increases the cost of their imports, ranging from items resold by informal traders to inputs for light manufacturing and farming. As small enterprises today account for 60 percent of South Africa’s employment and between 52 and 57 percent of its gross domestic product, according to the Deputy Governor of South Africa’s Reserve Bank, impact on small and growing businesses is a major concern not only for macroeconomists but also for grassroots communities. Unemployment officially maintains its grip on approximately 25 percent of the labor force (40 percent if we count workers who have given up looking for jobs) and more than 50 percent of the country’s young people.

South Africa: Students and Workers Focus on Unfinished National Agenda

Last week’s recent reshuffling is set against the backdrop of students, workers and their communities who are demanding a sharper focus on national development priorities. Students are often understood to be the “canaries in the mines” — the first to raise social and economic concerns and put them on the nightly news and front pages of national and international media. South Africa’s students are no exception. The recent “fees must fall” demonstrations protesting 10 percent tuition hikes rocked South African campuses from the University of Cape Town to the University of Witwatersrand, and brought protesters to the gates of Parliament, where they were met by police pepper spray and stun guns. Many campuses closed in the face of civil disobedience and immediate demands for the repeal of newly imposed fees. A number of universities are still in negotiations with their students, and the government has withdrawn plans for immediate tuition increases as it reexamines its policies and options.

While there has been no loss of life to date, the demonstrations recall the Soweto Rebellion in 1976, when unarmed high school students marched against the apartheid government’s threat to impose Afrikaans as the mandatory medium of instruction. Current tuition protests are also focusing the nation on South Africa’s unfinished agenda — specifically its promise to reduce colonial and apartheid era inequalities embedded in the economic and social structure (not the least of which are inequalities in the educational system and access to jobs).

Rising tuition costs are not limited to one country (sparking protests in the US, the UK and elsewhere in Africa), particularly given the financial stresses and growing inequality in the global economy. In South Africa, they are further fueling scrutiny of the rate at which government is advancing its agenda to bridge the gap between haves and have-nots, uphold the economic and social rights embedded in its Constitution, and create sufficient opportunities for its youth.

South Africa’s labor movement continues to raise these and other questions in the wake of last August’s third anniversary of the Marikana tragedy, when 44 people were killed — the overwhelming majority at the hands of the South African police. Although the national Farlam Commission completed its work in June, and documented the murders, it failed to hold anyone accountable, except for the national police commissioner, General Riah Phiyega. Despite recommendations that the families of the Marikana victims be compensated for their losses and suffering, there has been no compensation to date. Instead, the families have taken the matter to the High Court of Pretoria, and filed civil charges against Nathi Nhleko, the Minister of Police. They have also lodged claims (R150,000 for each affected family) for compensation for medical expenses, grief and emotional shock, psychiatric treatment, the loss of life and parental care.

The families would also like the Minister of Police to issue a formal apology. They note that despite the national outcry following the massacre, life has changed little in Marikana. Unemployment and crime levels have risen, particularly in the informal settlements, and many small shopkeepers who have made no profits for months fear they will soon have to shut down. Given the miners’ over-indebtedness, many have now been credit-blacklisted.

Lonmin (the mine at which the five-month strike that was met by violence took place) has established an education trust for school-age children of the dead miners, distributed statutory pension and life insurance benefits, and taken some steps to improve living conditions and educate workers to reduce “employee indebtedness.” The mine has also offered jobs to the miners’ widows, but few of them want to work underground. And the community, like the country’s other mining communities, is worried about retrenchments — specifically the 6,000 intended retrenchments Lonmin has announced. Lonmin’s shares plummeted 20 percent on August 19 as investors worried whether it would be able to refinance its own debt. The company has announced that cutting costs is one of its major priorities. Other mining houses are also in trouble. Mining companies have suffered from energy constraints — and are now facing the specter of reduced demand from South Africa’s major trading partner, China, in the wake of the devaluation of the yuan. (Ironically, for now, this move is bolstering the price of gold — perceived as a financial “safe haven.”) But it is unclear in the medium term that this will compensate for reduced Chinese demand for South Africa’s minerals.

On the political stage, the mines have gone on the offensive and challenged the government to set aside mining charters, which provide a road-map for transformation of the industry. They have particularly questioned the requirement for 26 percent black ownership — enshrined in the Mineral and Petroleum Resources Development Act.

At the same time, in the steel industry, which has not recovered from the 2008 financial crisis, companies and their workers are joining forces to lobby government to impose tariffs. They argue that out of the world’s 64 steel exporting countries, South Africa is the only one without steel import tariffs — leaving it vulnerable to cheap imports. At stake are 50,000 “direct” steel jobs, and 190,000 if truck drivers, cleaners and contract workers are counted. Some communities are particularly vulnerable. In the Vaal Triangle, an estimated 75 percent of the population depends on the steel industry.

The mining and steel crises are emblematic of the plight of South Africa’s manufacturing sector, which has contracted for two consecutive quarters. The sector is impacted by the declining rand, which hikes the cost of imported production equipment and materials. It is further impacted by electricity shortages, falling global commodity prices and demand, and rising production costs. The sector employs approximately half the 800,000 workers on its payrolls in 1994. During this period, its contribution to the country’s gross domestic product shrank from 24 to 11 percent. According to Stats SA, between April and July of 2015 alone, it lost 23,000 jobs.

In this context, as South Africans criticize, protest and rally, the World Bank is also encouraging South Africa to devote increased attention and resources on education and job creation, advising that such measures could elevate growth to 5.4 percent a year by 2030.

The bottom line for South Africans, despite government plans and initiatives, is a continuing jobs crisis. In January of this year, and after more than 20 years of lobbying, South Africa ratified the covenant of the UN International Covenant on Economic, Social and Cultural Rights that recognizes the right to work. The covenant is binding, and goes one step further than South Africa’s constitution by requiring that states must also recognize this right. And yet the August 20–26, 2015 Financial Mail reported that since the year 2000:

  • Only 33 percent of 8.5 million new job market entrants found employment;

  • As of June 2015, slightly more than 40 percent of the workforce was formally employed;

  • The unemployment rate is higher today than it was in 1994;

  • While half the country’s population is younger than 25, more than 50 percent of South Africans between 15 and 24 are unemployed.

This situation places serious pressures on the country’s low-income and working communities, and underscores the importance of our initiatives to create formal sector jobs, sustainable livelihoods — particularly in rural areas — and opportunities for South Africa’s most marginalized communities and next generation. They also place considerable pressure on the country’s leaders, and the African National Congress in particular, to address immediate needs, like housing, and to make good on promises, such as land reform.

Land reform

Land restitution, redistribution and tenure reform continue to evade any quick fix. Recently South Africa has designed two measures to speed up the process. The first is the effort of the Land and Agrarian Reform Project (LARP) to target five million hectares to resettle 10,000 people. This ambitious undertaking could run into difficulties by placing people on

farms too large or lacking sufficient resources to manage effectively. The African Research Institute has reported that 231,000 (of an intended 800,000 black farmers and entrepreneurs) received such redistributed land in 2013. But the allocations of an average of 20 hectares per household were designed largely as community trusts with imprecisely defined property rights.

This has proved to be less than a recipe for productive farming. The Mail and Guardian of August 7–1 3, 2015 reported that more than 50 percent of these farms have failed within two years after the transfers. In 2013, the African Research Institute had found that farms failed on 90 percent of land that was no longer productive in 2010. As government would now have responsibility for purchasing, subdividing the land, selecting tenants leasing the land, monitoring performance and evicting “non-performers,” it is not clear whether the new measures will accelerate the process or create further administrative delays. It also remains to be seen whether beneficiaries will receive the additional supports Shared Interest has found essential to commercial success: technical support and access to capital.

To address another major roadblock (willing sellers who offer their land to government at highly inflated prices), government is proposing a “valuation process” under the new Property Valuation Act (17) of 2014. Government would set up an office to assign fair values at which to compensate the previous owners for the redistributed land. These challenges underscore the importance of two of Shared Interest’s most recent guarantees to agricultural cooperatives in the Western Cape: Rietkloof and Mont Piquet. On these farms, table grape-growing cooperatives are enabling farmworkers (now majority owners) to benefit from government land redistribution, private sector technical support and access, with Shared Interest guarantees, to the necessary working capital. Every piece of this puzzle is essential for land reform to succeed.

Mozambique: Challenging Inequality in the Global Economy

Mozambique, where Shared Interest is also facilitating guarantees with the help of the Thembani International Guarantee Fund, continues to provide extremely fertile — though rocky terrain for development finance. The country’s economy — which grew at eight percent a year between 2001 and 2006 and has sustained a seven percent annual growth rate since then — wears its expansion proudly. Cranes nibble at the skylines of Maputo and smaller cities, while small enterprises sell bricks and cement blocks, wood and other building supplies along the roads. Construction is everywhere.

And yet, according to the World Bank, more than half of Mozambique’s 25 million people live on less than $1.25 a day. For young people the situation is challenging, with fewer than 13 percent earning a salary. The country’s labor market is unable to absorb all job-seekers. Last year USAID reported that in 2012, the economy (counting South Africa’s mines!) created only 280,000 jobs for 330,000 new workers. In 2010, the International Labor Organization (ILO) released data that the formal economy supplied approximately 700,000 jobs for a work force of 11 million people.

And so the vast majority of the country’s people survive through the informal economy. More than two-thirds of population works in agriculture, according to the Danish Trade Union Council for International Development Cooperation. According to Joseph Hanlon, author of Chickens and Beer, farm and forestry workers earn an average salary of $92 a month. In this context Shared Interest has focused on creating formal sector jobs through guarantees and technical support for new factories such as Maputo Cimente, and thousands of up-and-coming farmers and entrepreneurs through microfinance institutions like AfricaWorks Mozambique (AWM).

Mozambique’s government, which set up a socialist national framework when it liberated itself from Portuguese rule in 1974, is struggling for its policies to keep pace with foreign investment, which it is encouraging and attempting to manage. It has become a microcosm of key issues that confront economies struggling to compete in the global marketplace. In agriculture, for example, government is attempting to balance the national ownership of land and the extension of the DUAT — permission to occupy and utilize it. Large agribusinesses, ranging from European soy companies to Russian and Chinese rice farmers, have been welcomed — with at best mixed results. In the northern provinces, local farm communities are organizing to retain rights to use land that is being leased to multinational corporations.

Tensions are also evident in microfinance. In Mozambique the sector has witnessed little interest by commercial banks, most of which do not serve low-income people. Moreover, while government has welcomed microfinance as a means of assisting low-income people, it has left the field largely to donors. And with donor funds drying up in the region, the country’s developmental microfinance institutions (MFIs) are left to sort themselves out in the marketplace. Many of the nearly 20 that operated several years ago have folded, while only a handful have thrived (including AWM) — especially those beginning to lend to smallholder farmers. Some are becoming formal financial institutions. But national banking laws make this difficult by imposing regulations designed to protect clients from loan sharks.

As Mozambique seeks to channel its growth to support development beyond creating an increasingly unequal division of private wealth, it will be important both to address policy and to create viable vehicles and precedents. Shared Interest’s and Thembani’s guarantees and technical assistance to support broad-based agricultural initiatives and emerging enterprises are urgently needed in the country. This work is difficult and slow. But we are breaking new ground.

Featured Posts