By the Blouin News Business staff

South Africa’s strikes and the risk of stagflation

by in Africa.

A miner leads his fellow workers as they chant slogans during the one-year anniversary commemorations to mark the killings of 34 striking platinum miners shot dead by police outside the Lonmin's Marikana platinum mine in Rustenburg.South Africa’s economy, the largest and most developed on the continent, continues to perform below its capability. The wave of strikes now engulfing it will do nothing to reverse that. Worse, they amplify the risk of stagflation.

Violent disruptive strikes in 2012 both seriously affected precious metals output and shook assumptions underlying the country’s previously fairly stable industrial relations. This year’s “strike season” is proving as volatile a successor as feared.

South Africa’s economy is already losing an estimated $60 million a day to a strike by 30,000 workers in car manufacturing, which accounts for 6% of GDP. The labor strife is now set to spread to the gold and other mines. Gold is South Africa’s main minerals export. Natural resources account for two-thirds of the country’s exports.

Unrealistic wage demands by unions in the private sector, particularly mining where firms are facing difficult global trading conditions and rising domestic power and labor costs, are likely to disrupt output sufficiently this year to make even the modest 2.5% growth forecast by the government in February a stretch. Private economists are pencilling in 2% growth — if that — for the year.

Worse for the economy, the inter-union rivalry that is echoing the political divisions within the ruling African National Congress is only likely to make international investors even warier. The 4% long-term annual growth that the economy is realistically capable of won’t be achieved until investors are more reassured about domestic political conditions and that government promises of structural reform can be made good.

One readily apparent consequence of investor reticence is that private fixed capital investment remains well below its mid-2000s peak. Unlike peers with far less developed infrastructure, services and labor markets, South Africa has largely failed to attract significant natural resources investment in the last decade.

Low domestic savings and investment rates leave South Africa highly dependent on foreign capital inflows. As the country has a record current-account deficit (equivalent to 5.8% of GDP in the first quarter), this makes its currency particularly vulnerable now. The rand is one of the fastest falling emerging-markets currencies this year, down 16% against the dollar. That has already stoked the inflation rate, which in July, at 6.2%, broke through policymakers’ 6% upper limit target.

The latest union demands will only pile on more pressure. It is usual for union wage demands to begin well beyond market realities only for subsequent settlements to be much lower. Last year, opening bids averaged demands for 17% pay rises. Settlements were reached at 7.6%, though higher in mining (8.6%) following violent wildcat strikes at Lonmin, which made some awards at 22%.

However, this year’s wage demands are uncommonly extravagant. The National Union of Mineworkers, for example, is demanding 60% increases for underground entry level miners and 47% for surface level ones.

The de-linking of wage demands from both productivity and cost-of-living trends underlines the increasing political dimension to South Africa’s labor unrest. Such wage increases have become a crude instrument of wealth redistribution and a proxy for measures that President Jacob Zuma’s ruling ANC cannot or will not undertake to improve the lot of its core constituency, the “working poor” — though that has an elastic definition in a country where unemployment is officially 25% and more realistically approaching twice that number.

Twenty years on (next year) from the end of apartheid, there remains widespread frustration with the pace of the transformation of South Africa’s economy and lack of reduction in income inequality. Union rhetoric in support of wage claims plays into this by portraying mining as a foreign-owned industry perpetuating an imperialist model of exploiting African resources and repatriating profits while exposing workers to injury, disease and death.

It is an argument with popular resonance. The debate within the ANC over whether to nationalize the mines will not die, though the government has been sufficiently pragmatic to ignore it in policymaking. It has also bowed to the realities of a faltering economy and bulging deficits. It is shifting policy priorities from social and public-sector wage spending to export-boosting infrastructure investment, despite the deep factional divides that is causing.

Market disciplines are equally unforgiving. Without significant growth, finance minister Pravin Gordhan is struggling to rein in the fiscal deficit. Unstable labor markets driving higher costs married to an emerging pattern of growth that is below 3% and consistently below projections means stagflation is a risk that cannot be discounted.

Last year South Africa’s sovereign debt was downgraded for the first time since the end of apartheid. Earlier this year leading ratings agencies downgraded the country’s outlook from ‘stable’ to ‘negative’. They will wait to assess the extent of the damage caused in the current strike season before deciding whether to make a second cut in the country’s creditworthiness.