ANC and EFF coalition could bankrupt South Africa

An ANC/EFF coalition is a worst-case scenario outcome for the 2024 elections, as many businesses would likely leave South Africa or close down.

Investec chief economist Annabel Bishop said an ANC/EFF coalition would likely lead to debt default on excessive state expenditure and huge job losses in the country.

South Africans are set to vote for a new national government on 29 May 2024, with many polls indicating that the ANC is at risk of losing the majority vote for the first time since the party took power.

Should the ANC not get an outright majority, it will need to enter into a coalition with another party, like the EFF or DA, to make up the majority vote.

“An ANC/EFF coalition is seen leading to the severe down case, with the likelihood of debt default on excessive state expenditure, while private sector corporates would most likely depart from South Africa under an EFF regime or close down, with huge job losses,” Bishop warned.

She explained that income tax from corporations and high-income earners and the value-added tax on their spending are the key funders of the state’s revenue and, therefore, its expenditure. 

“The collapse of the private sector would also see the banking and rest of the financial services sector collapse,” she warned.

“A collapse of the financial services sector would see the collapse of the ability of government to issue more debt, as its source of borrowings is eradicated (mainly the domestic private sector) under severely ramped up state control.”

Foreign appetite for South African debt has already dried up considerably since the end of the 2000s, as the country’s borrowings escalated sharply and its creditworthiness declined. 

RMB fixed-income trader Michelle Wohlberg said earlier this year that demand for South African bonds will continue to falter as investor uncertainty builds.

She said investor hesitancy is commonplace in the lead-up to potentially major changes in government spending, which was set out in the 2024 Budget.

Wohlberg explained that there was some uncertainty about how the budget would go. In addition, South Africa’s general election makes this uncertainty more severe.

Bond prices have been volatile since the end of 2023. South Africa’s 10-year bond yield peaked at 12.00% in October, ending the year at 10.99% and dropping even further in the first two weeks of 2024.

The government also increased local debt issuance in 2023 despite many investors dumping local bonds in reaction to South Africa’s geopolitical blunders, increased load-shedding and the deteriorating trade balance.

“An ANC/EFF coalition would see even further negative foreign investor sentiment,” Bishop said.

She explained that the bulk of financial market investment comes from the Western Hemisphere, and South Africa would lose out on this funding to issue new debt and roll over existing debt.

“With government expenditure already close to R2 trillion, a massive swelling of this spend under the EFF election promises would render the country bankrupt, with a debt default, and so lose the ability to attract any foreign investment,” she said.

“Being bankrupt means the country would run out of money to pay social grants and civil servants wages in this scenario.”

“Foreign investors and countries would not invest hundreds of billions into South Africa, and certainly not trillions without a sound return.”

Bishop said South Africa needs trillions to sustain its current expenditure, and a few hundred billion would not be enough as envisaged in an EFF sovereign wealth fund.

“Markets worry election promises of the EFF don’t add up fiscally, and even the ANC’s ones may be a stretch, as Fitch highlights.” 

“The outcome of the 2024 national election has the ability to unsettle the rand, depending on voter support for the EFF.”