South Africa’s real test

South Africa’s real test is only beginning, with the country’s economic momentum threatened by the national election and potential policy instability following the polls. 

This is feedback from Stanlib chief economist Kevin Lings, who outlined the huge test the country is facing in the coming months. 

Lings explained that the country’s economic recovery has gained momentum in the past few months, with a reduction in load-shedding, a strengthening of the rand, and a potentially beneficial election outcome. 

“A couple of months ago, there was this expectation that South Africa’s financial markets would be under pressure as we head towards the 29 May general election,” Lings said. 

“I think that expectation was based on the uncertainty of the election plus the fact that the economy was obviously under significant pressure, and we still had load shedding”

“If we look at what’s happened, the opposite has materialised. If I look at the rand dollar exchange rate, that’s strengthened by something like 4.5 % over the last month. If we look at the equity market, that’s up 9% over the last month.”

Lings explained that this will be difficult to sustain post-election as there is less political pressure on the government to deliver services, and it potentially has to co-govern with a coalition partner. 

This may slow decision-making and derail its reform efforts, which are working, albeit slowly. 

“The real test now is we’ve got to have the election. It’s got to be successful, and we’ve got to hope that after the election, there isn’t a significant change in our overall policy agenda,” explained Lings. 

He is concerned about potential coalition partners ending the government’s partnership with the private sector to develop infrastructure, turn around state-owned enterprises, and grow the economy. 

“If that reform remains in place, then I think there’s upside potential for South Africa’s economy, and if you look at where valuations are, particularly equity valuations, that creates a positive backdrop and potential for upside.” 

According to Lings, the chances of the government’s reform agenda continuing are strong, with polls indicating the ANC will only need to partner with smaller partners to govern. 

“If that ends up being the election outcome then the feeling is that we continue on with the current policy reform, which is critical.”

This would exclude any potential coalitions that would be detrimental to the country’s economic performance, such as those with the EFF or MK Party, 

Lings’ views on the economy seem to be aligned with those of some of the CEOs of South Africa’s largest banks. 

Despite the ANC’s declining support, business leaders expect the country’s policies to remain largely unchanged as the ANC will remain the dominant political force. 

Standard Bank Group CEO Sim Tshabalala said in the company’s annual report that its base case is that the country’s policies will remain largely unchanged. 

“Our base case is that policy continuity will be largely maintained after the election, including the current administration’s programme of structural reform, a path that will gradually improve South Africa’s economic performance,” he said in his CEO’s report. 

However, Tshabalala said that uncertainty in the build-up to the election will limit investment in South Africa and, thus, economic growth. 

The bank’s South Africa CEO, Lungisa Fuzile, echoed Tshabalala in saying that no fundamental changes are expected to come as a result of the election. 

“We do not anticipate that the election outcome will lead to a change in policy direction. Accordingly, the continued gradual policy reform should be growth-supportive over time,” Fuzile said. 

Outgoing Nedbank CEO Mike Brown said on the sidelines of the World Economic Forum earlier this year that the ANC will be central to any future government in South Africa. 

The collapse of state-owned enterprises and state-run institutions has led many to believe the country needs political change and that change will occur in this year’s elections. 

However, Brown does not believe the ANC can be dismissed as a political force, and its policies will continue to be those of the national government for some time. 

“If you stand back and look at it from a policy point of view, the polls may indicate the ANC is losing support, but central to any government going forward will be the ANC and the policies they currently have,” he said. 

The ANC’s policies are largely correct in addressing South Africa’s major challenges but have taken far too long to implement. 

“Certainly, as business, we would want accelerated delivery of government’s stated economic policies because that is what is hindering economic growth.”