/ 9 August 2016

Caution, but also hope from financial industry after municipal elections

Cleaning up the environment is one way the DA intends to endear the residents of Nelson Mandela Bay.
Cleaning up the environment is one way the DA intends to endear the residents of Nelson Mandela Bay.

The dust has far from settled after the local government elections, as the serious business of solidifying leadership structures for municipalities gets underway.

The market welcomed the outcome, which has seen the erosion of support for the ruling ANC particularly in the major metros, with the rand strengthening against the dollar as the results were tallied.

But ratings agencies have already warned that although the weakening of the ANC reveals greater political competition, it may herald more populist policies by the governing party as it tries to restore support ahead of the 2019 national elections.

This again raises the spectre of credit ratings downgrades come December, should pressure mount for government to increase spending and deepen debt at national level.

The comments from Fitch and Moody’s prompted the national treasury to issue a statement on Tuesday, recommitting government to policy continuity.

“Government remains committed to implementing fiscal consolidation and returning public finances to a sustainable path while protecting core social and economic programmes,” director general Lungisa Fuzile said. He added that it was committed to its economic reform agenda, aimed at raising the level and inclusivity of economic growth.

The collaboration between business, labour and civil society to restore confidence in the economy would continue to grow Fuzile said, and this included amongst others, initiatives to reform state-owned entities and expand the independent power producer programme.

In a research report Moody’s said that the election results in key metro areas will likely put pressure on the ANC to raise expenditures on the national level as the 2019 elections neared.

“Specifically, rising social tensions linked to slowing growth and opportunities, as well as [Democratic Alliance] victories in local elections, may encourage the ANC to pressure the Treasury to break with its fiscal discipline,” the report said.

“It would be particularly damaging to the country’s future potential growth should the government succumb to pressures for higher current spending and sacrifice its infrastructure expansion program as a consequence of the ANC’s local election losses.”

Fitch said in a statement that although municipalities have no role in macroeconomic policy-making, the blow to the ANC’s traditional predominance “could have an impact on policies, depending on the political repercussions and the conclusions that ANC leaders draw”.

“There is a risk that the ANC turns to more populist policies to address rising voter dissatisfaction with perceived insufficient improvements in living conditions since the end of Apartheid. This could include costly spending measures that could require breaching expenditure ceilings or redistributive regulatory policies that might undermine economic growth.”

On a practical level, managing the coalitions now needed to run some of the country’s most important metropolitan areas poses its own challenges, according to Ralph Mathekga, head of political economy at the Mapungubwe Institute for Strategic Reflection (Mistra).

Although the extent of the ANC’s weakening in metros – particularly the likes of Johannesburg and Tshwane – was a major shift, he said a period of greater uncertainty lay ahead as political parties negotiate and, then must sustain, coalition governments.

Although the private sector might welcome the weakening of the ANC’s dominance over South Africa’s democracy, “coalitions increased the burden of decision making”, Mathekga said.

“It delays decisions. It creates uncertainty. It’s actually very bad in a situation where local government is in such dire straits.”

It would be a challenge for politicians, who would have to “mature overnight” in order to compromise and negotiate with the interests of voters, rather than political party elites, in mind he said.

Apart from the Democratic Alliance’s record in the Western Cape, South Africa did not have a robust history of coalition governance Mathekga argued.

“[We] are going into a risky environment”.

Nevertheless in a press statement Maarten Ackerman, investment strategist at Citadel Advisory, called the election results “largely business friendly” judging by the performance of the currency on Friday.

The rand had reached R13,67 to the dollar said Ackerman, despite “bumper” US employment figures that came out on the same day, and boosted the greenback.

“A strong rand should provide inflation relief, reducing the likelihood of further interest rate hikes this year,” he said. “A further cut in the fuel price can be expected next month, after the generous cut in August, which will provide the consumer with urgently needed relief while also boosting sentiment.”

The currency appeared to sustain this buoyancy into the week, reaching around R13,44 on Tuesday afternoon according to Bloomberg.

While the economy was still weak, some green shoots were appearing, said Ackerman.

Since February government finances have been improving and the fiscal deficit was moving in the right direction, while better mining, manufacturing and trade statistics had been posted, he noted.

“While this won’t propel us into a high growth phase yet, the signs are certainly encouraging.”