Decisions: The coalitions the ANC choose to form seem likely to shape which way the South African economy will go. (Waldo Swiegers/Bloomberg via Getty Images)
ANALYSIS
Markets were on tenterhooks this week, as the election aftershock wore off and political parties entered into coalition talks.
While a deal has yet to be struck, what is clear is that the ANC — which endured an enormous defeat at the polls last Wednesday — could end up having to make considerable policy concessions to stay in power.
A coalition between the ANC and its official opposition, the Democratic Alliance (DA), has been framed as the country’s best bet to avoid a doomsday scenario, which will apparently tank its already ailing economy. But an ANC-DA tie-up won’t necessarily arrest South Africa’s economic decline.
Data released earlier this week showed that South Africa’s economy contracted in the first three months of 2024. Although slight (0.1%), the GDP decline marked the tenth quarterly contraction since Cyril Ramaphosa assumed the presidency in 2018.
The ANC paid the price for the country’s economic crisis in last week’s vote, which saw the party’s support plummet from 57.5% in 2019 to just over 40%.
The DA grew its support, albeit slightly, securing 21.81%. Somewhat surprisingly, at least from a markets perspective, Jacob Zuma’s uMkhonto weSizwe (MK) party made a stunning debut — winning 14.58% of the vote and relegating the Economic Freedom Fighters (EFF) to fourth in the polls.
Although it was widely assumed that the ANC’s vote share would dip below 50%, forcing the party to enter into a coalition of some sort, some did not see such a severe battering coming.
For example, in modelling the possible effects of the elections, Oxford Economics had a baseline scenario in which the ANC held on to between 46% and 49% of the vote — allowing the party to form an alliance with much smaller parties to get it over the line. In this scenario, the EFF would have seen its support grow to 15%, with the MK party securing just 4.5% of the vote.
This result would have little effect on South Africa’s grim growth outlook, according to Oxford Economics.
The think tank also considered the effects of an ANC-DA coalition, which appeared to be somewhat of a long shot at the time, as well as of a pact between the governing party and the EFF.
Speaking to the Mail & Guardian on Tuesday, Oxford Economics’ senior economist Jee-A van der Lindee said that in the latter scenario — described by the DA in the lead-up to the election as the “Doomsday Pact” — almost every South African economic indicator would deteriorate. An ANC-MK party coalition, which Oxford Economics did not model, would have broadly the same effect, he said.
On the other hand, if the ANC comes to an agreement with the DA — and avoids being drawn to the “left” (as some analysts describe the EFF’s and MK’s political orientation) — the economy should improve, according to Van der Linde.
That said, it is unlikely that near-term economic growth will shoot the lights out, he noted. Meanwhile, political regime risk will be notably higher than in the baseline scenario.
This comes as the ANC and DA attempt to iron out their differences in potentially their first-ever partnership. A number of the promises in the DA’s manifesto, including phasing out the national minimum wage, fly in the face of ANC policies. The DA has also taken a firm stand against the National Health Insurance Act, which Ramaphosa signed into law just weeks before the election.
“But I guess you could say that in any coalition there would be risks,” Van der Linde said.
Commenting on the election outcome on Monday, Aurelien Mali, a senior credit officer at Moody’s, said the prospect of a coalition government may usher in a period of policy uncertainty.
“A coalition government could complicate the execution of fiscal, economic and social policies that would help address South Africa’s structural credit weaknesses, such as slow economic growth, inefficiencies in the energy and logistics sectors, and high unemployment,” Mali said.
But, Van der Linde noted: “If you look deeper, perhaps the two parties, the ANC and DA, might be more aligned. Ramaphosa’s faction might be seen as more centrist and inclined to favour more business-friendly policies.”
The current government and the DA certainly share some views on macroeconomic policy, including on the need for fiscal consolidation.
In the ANC-DA scenario, Oxford Economics sees the rand strengthening throughout the second half of 2024, in the same way that it did after Ramaphosa dethroned Zuma.
While the bond market initially reacted negatively as election results trickled in last Thursday — and an ANC blowout started to come into focus — this Monday it recorded quite a strong pullback.
This change of tune may be attributed to an ANC-DA coalition becoming more of a reality, as political parties endeavour to keep Zuma as far out of the picture as possible. The MK party has said in the past that it would only be willing to work with the ANC if Ramaphosa resigns, which may have already convinced the incumbent governing party to take talks with the DA more seriously.
Reza Ismail, the head of bonds at Prescient Investment Management, noted that while the bond market tends to experience heightened volatility around elections, this usually fades in the weeks that follow.
Notwithstanding the volatility around election windows, according to Ismail the South African bond market’s key long-term determinants were almost exclusively global in nature — such as the strength of the US dollar and the attractiveness of carry-trade, which generally sees capital flowing from traditionally low interest rate developed economies to high interest rate emerging markets.
These supportive global factors rely on the strength and integrity of key institutions such as the South African Reserve Bank and the judicial system being maintained. Should coalition talks result in concessions that jeopardise the independence of these institutions, South Africa’s attractiveness as a destination for global risk-on capital would be severely compromised, Ismail said.
Zuma’s party has expressed its contention to nationalise the Reserve Bank, as well as all large financial institutions. The party has also promised to scrap the Constitution, which entrenches the central bank’s autonomy.
Earlier this week, Fitch warned that if the ANC were to align with the MK party or the EFF, it could jeopardise macroeconomic stability if it leads to a broad weakening of investor confidence or eroded governance. South Africa could face negative ratings action in the event of a significant increase in the government’s debt-to-GDP ratio, Fitch said in January.
On the other hand, Fitch said, a government backed by the DA would probably enable Ramaphosa to continue implementing his main economic priorities, including tackling infrastructure issues.
“It would likely result in the least significant changes to key credit metrics, such as South Africa’s debt trajectory, over the medium term, although fiscal tightening might be enhanced,” the ratings agency said.
But for Duma Gqubule, a research associate at the Social Policy Initiative, an ANC-DA coalition — through which the government escalates austerity — would bring about a true reckoning.
“There is going to be a one-month rally in the rand and then it is going to fade away, just like the New Dawn,” he said, referring to the early days of Ramaphosa’s presidency.
Gqubule said an ANC-DA deal would reproduce the existing economic policies that have created South Africa’s current low-growth predicament. “And it entrenches them in the context of a 62% majority,” he said.
Last year, the DA tabled a private members bill that would introduce a fiscal rule limiting public spending. Parliament ultimately rejected the legislation, which the ANC’s alliance partner, labour federation Cosatu, said would recklessly impose significant cuts to public services.
“They will impose this fiscal rule and it will tighten the screws even more than they have been tightened over the past 15 years,” Gqubule said.
“So South Africans must focus on what has happened. Over the last 15 years there has been 1.2% GDP growth … If you tighten the noose through this fiscal rule it is going to be more of the same 1.2% at best from the next administration.”
Gqubule suggested that an ANC-DA tie-up would probably accelerate the former party’s decline. “The real doomsday scenario is this one, not the propaganda that Helen Zille [chair of the DA’s federal executive] is telling all of us. This is the real doomsday scenario. It is guaranteed to cause a revolution in South Africa.”