Old Mutual coalition warning

South African financial markets will remain volatile for the next two weeks as political parties enter coalition talks, with there being a strong possibility of a sharp selloff in local assets and a sharp decline in the value of the rand. 

This is feedback from Old Mutual chief economist Johann Els, who said last week’s elections had created a seismic shift in South African politics. 

For the first time in 30 years, the ANC lost its majority, securing only 40.18% of the vote, while former President Jacob Zuma’s MK Party had a strong first showing. 

This dramatic change has significant implications for the country’s economic and political future, Els said, as the nation faces a period of uncertainty and potential market volatility.

“The election results were within the risk spectrum of our expectations, albeit on the higher end. The probability of a coalition or minority government remains significant, which likely suggests a continuation of current policies.” 

“However, the possibility of a more populist coalition cannot be discounted,” Els warned. 

He explained that South Africa’s financial markets are expected to remain unsettled over the two weeks until a coalition is formed. Depending on the makeup of the government, local assets could experience a sharp selloff. 

“The rand may experience volatility, potentially seeing a sharp sell-off as risk premiums rise.”

“This scenario mirrors the events of December 2015 when the former Finance Minister, Nhlanhla Nene, was replaced. A negative outcome, such as a leftist coalition, could lead to a substantial sell-off,” warned Els. 

Despite the political upheaval in the build-up to the election and in its wake, South Africa’s democratic processes remain robust, and there is no need to make hasty financial decisions. 

Els urged investors and savers to stick to established financial or investment plans and consult financial advisors before taking action. 

“It is crucial to remember that South Africa has significant inherent strengths that will mitigate political risks,” Els highlighted. 

“These strengths include a strong constitution with entrenched rights, an independent judiciary, including a fiercely independent Constitutional Court, and a free media.”

“It also includes independent institutions such as the South African Reserve Bank (SARB), the Treasury and the South African Revenue Service (SARS), a well-regulated financial sector and deep capital markets.”

“The end of the state capture era, with society determined to prevent its recurrence, has also cultivated a healthy private sector that plays a vital role in the economy, especially in areas where the state and state-owned enterprises have faltered.”

Scenarios range from an ANC, DA, and IFP coalition, which markets favour due to the promise of more policy reform, stronger implementation, and a firm stance against corruption, to a Government of National Unity (GNU) involving the ANC, DA, MK, EFF, and IFP. 

While this option offers broad buy-in, it could be seen as detrimental to policy and growth due to potential conflicts. 

An ANC minority government supported by the DA and IFP might maintain current policies but could be viewed as less stable.

An ANC, MK, and EFF coalition would be the least favourable outcome unless there is a strong consensus to continue current ANC policies, which is unlikely.