South Africa

Elections stoke policy uncertainty in South Africa

Policy uncertainty rose in the first quarter of this year, as South Africa’s upcoming elections are affecting business confidence and weighing on investors and the markets.

This was revealed in the latest Policy Uncertainty Index (PUI) from North-West University’s Business School for Q1 2024.

The PUI tracks news coverage of uncertainty, the views of a group of leading economists on levels of policy uncertainty, and the Bureau for Economic Research’s Business Confidence Index. 

Any increase above 50 reflects greater policy uncertainty, while a decrease below 49 reflects less policy uncertainty.

The index reached a record level in the second quarter of 2023 but has since been on a downward trend – until Q1 2024.

In the first quarter of this year, the index rose edged further into negative territory, going to 65.8 from 65.5 in Q4 2023.

A large reason for this is South Africa’s upcoming elections, which have led to heightened uncertainty as the ruling ANC could potentially lose its majority for the first time since it took power.

“Not unexpectedly, the prevailing uncertainties around the pending South African election and its outcome have now also contributed to business confidence being brittle in 1Q 2024,” the report said. 

“Although, as the political dynamics unfold, the economy will continue with its daily activities, the uncertain political outlook is now also weighing on investors and the markets as to possible election outcomes.”

The report highlighted the link between the policy uncertainty index and economic outcomes in South Africa.

“Empirically, it shows that when economic policy uncertainty is strongly present in the environment, it indeed lowers investment, employment, and output,” it found. 

“High levels of such policy uncertainty inhibit meaningful investment and consumption.” 

“Elevated policy uncertainty in many countries contributes to sluggish growth. Economic policy uncertainty then has actual consequences for the economy.”

Policy uncertainty scares off investors

Investec CEO Richard Wainwright

These findings echo comments from Investec South Africa CEO Richard Wainwright, who told CNBC Africa on the sidelines of the World Economic Forum earlier this year that uncertainty is the main issue on the continent. 

He said policy uncertainty in South Africa scares investors and prevents them from investing in the country, hobbling economic growth. 

“The issues are around uncertainty, particularly about policy frameworks. The continent and South Africa in particular have a lot of work to do on that front,” Wainwright said. 

Increased uncertainty results in increased volatility in financial markets, which results in investments not being made. 

He explained that high levels of uncertainty have a chilling effect on investment deals, with decisions effectively being put on hold. 

“It is policy certainty that will be the key driver for investment,” Wainwright said.