While it is clear that the ANC, with 40% of the national vote, will dominate the next government, it does not necessarily follow that economic policy continuity is guaranteed — something that was the consensus expectation before the election.
It remains to be seen whether parties with opposing ideologies will, first, be willing to work together in a government of national unity, or GNU (the EFF has said it will not work with the DA). Second, if they do, it’s unclear whether they would be capable of effective delivery.
At best a GNU could, over time, pull all parties towards the centre. But it could also lead to policy gridlock, and implode due to constant infighting.
Heightened levels of political uncertainty are evident from the rand’s gyrations over the past week. From an initial low of R18.51/$ when it seemed the ANC was leaning towards partnering with the pro-business DA, it spiked to just over R19/$ on Thursday when this prospect was rejected by the ANC’s tripartite allies. It then recovered to R18.85/$ after the ANC declared a GNU its favoured option.
Political analyst Nic Borain says the ANC’s decision to favour a GNU masks its failure to make a choice between the DA and the EFF — an “avoidance strategy” that increasingly looks as if it will fail, as the GNU option appears to be producing a DA, IFP, ANC result after all.
The economy is unlikely to emerge from its low-growth trap if the ANC’s existing redistributive economic policy approach is followed for the next five years
— WHAT IT MEANS
If the EFF and the MK Party unequivocally reject being part of a GNU, Borain considers it unlikely that the ANC’s national executive committee (NEC) will accept the arrangement, which could lead by default to a minority ANC government — the most unstable arrangement of all.
“Frankly, I think the only result the NEC would accept is if the EFF and the DA both joined,” says Borain. “It appears the DA hasn’t put the EFF presence as an absolute barrier to entry into the GNU, but the EFF appears to have done just that [with regard to the DA].”
The DA has agreed to participate in a GNU provided it adheres to certain principles. These include maintaining the independence of the Reserve Bank, protecting the constitution, ensuring fiscal sustainability, creating a corruption-free public service and continuing key reforms under Operation Vulindlela — all of which are existing government policy. It also wants policing and passenger rail powers delegated to the provinces.
If the ANC had decided to form a simple governing coalition with the DA from the start, the country’s economic outlook, the rand exchange rate and business confidence would have unambiguously brightened.
According to BMI, a Fitch Solutions company, such a coalition would have reassured investors because it would have implied that the country’s business environment would improve and that there would be less regulation and greater opportunities for private sector investment.
BMI speculates that under such an arrangement the DA may even have prevailed on the ANC to front-load fiscal tightening, which would have improved the country’s debt outlook.
From a sovereign credit ratings perspective, the two overriding considerations are whether a GNU will lead to a further weakening in trend growth (which undermines fiscal consolidation and raises socioeconomic pressures) and/or to a significantly higher debt ratio than expected.
A deterioration in either of these metrics could lead to South Africa’s credit rating being cut deeper into junk territory.
Fitch Ratings said in a statement before the ANC asserted its preference for a GNU that if the MK Party or the EFF were brought into a governing agreement with the ANC, their most radical policies would probably not be implemented. These include wide-scale land expropriation, the nationalisation of key industries, the halting of fiscal consolidation and an aggressive increase in social grants.
“Nonetheless, even if the most radical policies do not come to pass, we believe that South Africa’s debt trajectory would face additional risks if the ANC enters into arrangements that rely on support from the MK Party or the EFF,” Fitch Ratings said.
“This outcome could pose additional challenges to macroeconomic stability, for example if it led to a broad weakening of investor confidence or to eroded governance.”
Citi economist Gina Schoeman’s view is that South Africa is likely to have less government stability under a GNU, as this option means having to accommodate many more different views. This is despite the ANC stating that all parties to the GNU must commit to shared values, the constitution, the rule of law, nonracialism, stability, transparency and good governance.
Ultimately the mix of parties will determine which way the GNU leans on economic policy, but which party and which individuals fill which cabinet posts will also be critical.
Schoeman expects that the ANC will likely retain the ministries of finance and those now spearheading key economic reforms (electricity, mining and transport) as well as public service and administration, given the need to improve its performance in the municipal elections. But that means many other cabinet posts would suddenly be up for grabs.
What economists can say for certain is that the South African economy is unlikely to emerge from its low-growth trap if the ANC’s existing redistributive economic policy approach is followed for the next five years.
This assumes that an ANC-dominated GNU would double down on existing ANC policies, entrenching the status quo, and that the pace of economic reform would not pick up significantly over the next few years.
In an ANC-continues-to-dominate scenario, Momentum Investments economist Sanisha Packirisamy expects the policy focus to remain foremost on redistribution (as opposed to growth) and for the pace of reform to remain slow relative to expectations — too slow to significantly shift the dial on the country’s growth potential and arrest fiscal deterioration.
Momentum is forecasting real GDP growth to average 1.9% over the next five years, approaching 2.5% only in the outer years, contingent on a continuation of reforms in key areas, including energy and logistics.
At best a GNU could, over time, pull all parties towards the centre. But it could also lead to policy gridlock and implode due to constant infighting
This assumes there will be a significant alleviation in energy supply constraints over the next few years, but that transport and logistics problems will continue to hinder growth, and that inadequate water supply will emerge as the next big constraint.
For Sanlam Investments chief economist Arthur Kamp, the critical thing is whether the new governing arrangement leaves expectations intact for a continuation of fiscal consolidation and structural reform, including the focus on a privately funded infrastructure push.
“Without economic reform and higher growth, we are eventually likely to end up with a continuing increase in the unemployment rate and fiscal failure,” he warns.
Business Leadership South Africa makes a similar point. In a statement issued late last week, it says: “The priority must be the continuation of economic reforms that have begun under the previous administration to address the serious issues facing our economy, including load-shedding, the underperformance of our ports and railways and the rebuilding of the criminal justice system.”
These reforms are critical to turn the tide on unemployment and restart economic growth, it adds, noting that the urgency is underlined by the fact that economic growth contracted by 0.1% in the first quarter.
As such, it urges the ANC to move with speed in forming a stable, lasting GNU “to reassure all South Africans, as well as businesses and investors, that the government will be committed to a constitutional democracy and the institutions that it rests on, including a well-managed National Treasury and the rule of law”.
Schoeman’s view is that monetary and fiscal policy will likely have to adopt a stricter approach under a GNU to counter the higher risk premium that will be associated with this form of government (depending on which parties are eventually included).
In fact, she believes the first real test for the GNU will be whether to bring forward the introduction of a fiscal (debt) rule and a lower inflation target. The emerging consensus was that both these developments would be held in abeyance until at least the February 2025 budget.
BMI warns that should the currency weaken sharply, for instance on the announcement of a coalition government involving either the EFF or the MK Party, this would push up inflation and potentially force the Reserve Bank to adopt a more hawkish stance.
It estimates that a short-term 10% fall in the rand/dollar exchange rate would push average inflation up from 4.5% to 5.5% in 2024. It believes the Bank would respond by raising the repo rate by 100 basis points, leaving the economy about 0.3 percentage points smaller in 2026 and 2027 than it would otherwise have been.
North-West University professor Raymond Parsons suggests that one way for the ANC to narrow policy differences in a GNU could be to revive and update the National Development Plan (NDP), as it has always enjoyed broad political support.
“A revised NDP could offer a potential political and policy platform on which consensus might be built,” he says. “If accepted, it would promote policy certainty under the new political dispensation compared with the present unknowns ... and would be positive for business and investor confidence.”
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