South Africa Defence and Security Report Q4 2008

The major internal security development in South Africa recently has been the outbreak of very serious anti-immigrant riots in a number of areas of the country. The wave of violence, much of which was concentrated in and around Gauteng province and the Johannesburg area, started on May 11 and over the rest of the month led to the death of 62 people, with hundreds injured, and tens of thousands displaced from shantytowns where they were living to new makeshift camps. This situation stabilised in June with South Africa Troops subsequently withdrawn from Johannesburg, Cape Town townships. Most internally displaced persons (IDPs) reportedly returned to neighbouring states and on June 12 the government announced plan to reintegrate some 20,000 remaining IDPs before closing camps in two months.

However, at the heart of the problem lies the large influx of immigrants from neighbouring countries, especially from Zimbabwe, and observers have said that the political and economic crisis within Zimbabwe has been so acute that the flow of emigrants leaving that country did not appear to have diminished. Although many immigrants have considered returning to their home countries, a further escalation in Zimbabwe's political crisis could trigger a new wave of refugees entering South Africa, which could lead to a worsening in unemployment and increase competition for local resources. We therefore believe that the recent outbreak of violence in South Africa could significantly harden the ruling African National Congress (ANC)'s stance towards Zimbabwe's President Robert Mugabe. While military action is not a policy option, the South African government could opt for economic sanctions to put pressure on the Zimbabwean authorities. That said, possible political repercussions from intervention and Zimbabwe's status as a historic long-term ally could prevent the South African government from taking any decisive action at all.

In our view, a further likely deterioration of the domestic growth outlook and surging inflationary pressures add another dimension of risk to social stability. Indeed, while we forecast that real GDP growth will decelerate by two percentage points to 3.1% in 2008 (thus increasing the risk of job losses), we expect headline inflation to remain relatively high in 2008 and ease to 8.5% year-on-year (y-o-y) at the end of the year, down from an expected peak at around 12.0% in Q308 (as projected by the South African Reserve Bank, SARB). Although declining, it is noteworthy that the decrease in inflation will be mainly due to base effects during the latter half of H208 and not because of underlying disinflationary trends. As a result, the burden of inflation will be maintained on consumers and is therefore likely to continue to weigh on social stability.

Aside from violence and deteriorating economic conditions, we believe that the ongoing internal divisions within the ANC will also fuel political uncertainty and will remain a risk to policy continuity for quite some time. In September 2008 Thabo Mbeki was forced to resign, and was replaced as interim president by Kgalema Molanthe. Rightly or wrongly, Mbeki has been accused of providing insufficient leadership to the ANC and the country as a whole, facing severe criticism over his government's inability to prevent the attacks on foreigners and over his allegedly ineffective 'silent diplomacy' strategy in Zimbabwe. With presidential elections due in 2009, Jacob Zuma therefore remains the current favourite to win, having received the backing of the ruling ANC at its annual conference in late 2007. While the power struggle between Mbeki and Zuma will likely have taken a toll on South African politics, we believe that the ANC is unwilling to give in to the growing demands made by the trade unions and the communist party. So while we believe that South Africa is far off from surrendering its market economy to a centralised planning model, the differences nevertheless depict the ideological gap between the ANC and COSATU and SACP, could give rise to further rifts in the future.

Internally, South Africa faces the daunting challenges of an anti-immigrant xenophobia, well-established organised crime and drug trafficking networks, vast wealth disparities, and high levels of HIV infection within its population. Yet its security concerns also extend beyond its borders. Recent restructuring and moves to modernise the South African armed forces have created the best-equipped and most advanced military on the African Continent. As the hegemonic power, particularly in the southern Great Lakes region, it has a heavy involvement in the continent's trouble spots in terms of securityforces/peacekeeping deployments. While the numerous security threats in the region have the potential to destabilise South Africa on a variety of levels, the potential for its neighbours - particularly Zimbabwe - to destabilise it, economically and politically, is especially strong.

The defence industry witnessed major upheavals with the lifting of the arms embargoes on South Africa which led to increased competition from foreign companies. With the South African National Defence Force (SANDF) no longer a captive customer of the sector, companies have had to shed large sections of their workforce, leading to dwindling numbers. Recent procurement packages may be the first step in reversing this trend. However, arms imports should increase substantially with the delivery of the major weapons platforms recently ordered by the government, particularly with the recent normalisation of relations between the US and South Africa. The future of the South African defence industry depends on its successful breaking into international markets. Joint ventures (JVs) will aid the country in gaining a technological lead in key areas. Currently, the biggest single long-term problem within the defence industry is the lack of research and development (R&D), funding and policy. Arms exports are proving a more vital area of sales for South African defence companies, and should be the main catalyst for any growth in the industry. Encouraging figures from key defence companies seem to suggest that the defence industry is growing and making inroads into international export markets.