South Africa Defence and Security Report Q2 2009

The African National Congress (ANC) is likely to emerge victorious from the April 22 parliamentary elections, with the Congress of the People (COPE) – an ANC splinter party formed in late 2008 – not likely to pose a serious threat to the ANC at the poll. A lack of funds, limited time to build a large support base and the difficulty of differentiating itself effectively from the ANC will curtail the COPE's ability to mount a major electoral challenge.

While certain aspects of the elections appear to be a fait accompli, we believe that South Africa's political future and stability are by no means as clearly mapped out as they may seem. An important question remains whether the ANC will be able to hold onto its two-thirds majority in parliament. While a loss of the majority will not completely undermine the ANC's dominance over South African politics, it would nevertheless make the passing of certain bills in parliament more difficult. Perhaps more importantly, the party would lose its ability to implement unilateral changes to South Africa's constitution, which could have significant implications for political stability should ANC President Jacob Zuma's corruption trial go ahead. However, it should be noted that the National Prosecuting Authority (NPA) stated on March 18 that South African prosecutors were considering withdrawing corruption charges against Zuma.

Ongoing high levels of private investment in the run-up to the 2010 FIFA World Cup football tournament will play an integral part in dampening the negative impact of the global recession on the South African economy. In fact, we believe South Africa will remain one of the few major emerging markets in which gross fixed capital formation will remain in positive territory in 2009. Aside from partially mitigating the negative impact of the recession in 2009, we believe hosting the World Cup will also be instrumental in leading to a relatively strong economic recovery in 2010 – with the event stimulating investment, service export growth and private consumption.

Slumping real private consumption and contracting real export growth will weigh heavily on economic activity during the coming year. The domestic economic crisis is expected to negatively impact the South African labour market. With job security an increasing concern, several South African labour unions have called upon the government to bail out businesses which are at risk of going bankrupt.

Increased foreign competition – the result of the lifting of arms embargos – has forced South Africa’s defence industry to make significant adjustments. Although companies have laid-off significant numbers, recent procurement packages may reverse this trend in the long-term. Nevertheless, it is likely that recent government orders will increase arms imports. Despite some signs that inroads into international export markets are boosting company results, it is imperative that the South African defence industry break into international markets. At present, a lack of funding, policy and research and development (R&D) are hampering the industry.

The significant players remain Denel, the former manufacturing divisions of Armscor, BAE Systems’ Land Systems South Africa, African Defence Systems (ADS), Grintek Defence & Technologies, Reutech and the civil and military aviation industry specialist Aerosud.