South Africa faces five tough years

South Africa is caught in uncertain times as it faces a change of government for the first time in 30 years, which could make the next five years tough for the country.

South Africans headed to the polls on 29 May 2024, where, for the first time since 1994, the ANC did not attain a majority.

This means the ANC needs the support of opposition parties to remain in power. The ANC is currently in discussions with other parties to form a coalition government or government of national unity.

The latest information suggests that an ANC and DA tie-up makes the most sense and would see the best market reaction. However, it faces resistance from within some ANC quarters and its allies.

The ANC’s National Working Committee (NWC) has recommended the formation of a government of national unity involving the DA, EFF, IFP, and potentially other parties.

Fitch Ratings said the permutations of government could have very different policy implications for South Africa, which will affect the economy and the country’s finances.

Regardless of what the new government will look like and which parties are involved, the next five years are set to be a challenge.

Old Mutual investment strategist Izak Odendaal said the immediate market reaction to the election outcome was negative. However, that does not mean that the outcome was negative.

“Democracy is alive and well in South Africa. Voters are still engaged and turned out in numbers to express their hopes and frustrations,” he said. 

Odendaal explained that while coalition talks are tentatively underway, given the scale of the election surprise, the biggest discussions are probably happening inside each major party. 

“They need to agree on what they want internally before negotiating externally. It could take weeks for talks to be finalised, so we will have to wait,” he said.

He explained that several different things could still happen, but the market will treat the outcomes as binary – either a ‘Grand Coalition’ between the ANC and the DA and others emerges, which would be seen as positive, or there will be a leftist/populist coalition of the ANC and either the EFF or MKP, or both.

“In the case of the former, South African assets and the rand would rally, while they would sell off in the case of the latter,” he said. “However, beyond the knee-jerk market reaction, complexity and nuance exist.” 

For example, Odendaal said that while the ANC and DA share much in common regarding the substance of their policies, there remains a wide gap in terms of their political style, which could make the relationship volatile. 

If the ANC partners with the EFF, the latter’s relatively weak showing in the election means it will not have the upper hand in setting coalition priorities.

Odendaal said it is also not the case that there has been a decisive shift to the left on the part of South African voters.

“The parlous state of government finances means there is no room to embark on fantasies like widespread nationalisation,” he said. 

“The EFF’s growth has topped out, while the MK’s success is probably more due to ethnic mobilisation and a protest vote by disgruntled ANC voters than a leftist policy platform.”

At a recent S&P Global event, Standard Bank CEO Sim Tshabalala said that after the surprising election outcomes, South Africa’s institutions will continue performing their jobs over the next five years as democracy matures and the new government takes office.

This sentiment has been echoed by South African Reserve Bank Governor Lesetja Kganyago, who has said that the bank will continue to ensure price stability, regardless of the political uncertainty caused by 2024’s elections.

“We will continue to deliver on that mandate, irrespective of how our post-election politics plays out, whatever the outcome in the next two weeks,” he said. 

“We will continue to account to Parliament and continue to work for the economic betterment of all South Africans.”

The governor said the only impact of the change in government would be what kind of policies any coalition develops and whether those policies are sustainable. 

“If the policies are not sustainable, we might not have investment. If they are sustainable, then we will talk about a different future,” he said.

Efficient Group chief economist Dawie Roodt has also warned that South Africa is in deep trouble and faces a tough five years as the country transitions.

He told Biznews that a new government must address three main challenges in South Africa: municipalities, state-owned enterprises, and the government’s finances.

Firstly, Roodt said local authorities are a mess and financially unstable. They owe Eskom R75 billion and will ask the Finance Minister for money to continue operating.

“The local authorities are extremely important because they are responsible for giving people electricity, water, and roads,” he said.

Secondly, state-owned enterprises are equally disastrous. Most of them have collapsed due to mismanagement and corruption.

“Just about all the state-owned enterprises have been run into the ground financially and operationally,” he said.

Lastly, South Africa’s national accounts are in a dismal state and have become unsustainable, with debt of between 75% and 90% of GDP.

“Our debt has reached very high levels and is increasing at around 3% per year. That is unsustainable,” he said.

He added that many other problems, including labour policies and trade issues, also need to be fixed. Because of the dismal state of the country, the ANC is losing support, and South Africa is in a transition period.

“The next five years are going to be very difficult because it is a transition period where we are getting rid of the ruling party,” he said.