S&P’s warning about South Africa’s new government

Rating agency S&P Global said South Africa’s new government of national unity would likely not cause a significant policy shift, but ideological differences between parties could destabilise the government.

On 14 June, the ANC – which has ruled South Africa for three decades – announced a broad coalition with the DA, the IFP, and the PA after securing 40.2% of the vote.

This new “government of national unity” (GNU) already has a nine-point agenda that prioritises structural reforms to address basic infrastructure and service delivery shortfalls and weak investments while gradually narrowing fiscal deficits. 

S&P said the election outcome is more favourable for the economic and fiscal outlook than the alternatives. 

“Nevertheless, we expect the government will face an uphill battle to revive growth and maintain fiscal discipline while navigating the new realities of coalition politics,” it said.

It explained that, despite the reasonably constructive outcome, significant ideological differences between the ANC and the DA on issues such as affirmative action and foreign policy could destabilise the government. 

While increased political participation and a push from the more market-oriented DA could drive stronger reform momentum, coalitions are untested at the national level.

“At the provincial and municipal levels, coalitions have been volatile and resulted in a high turnover of mayors,” the firm said. 

“Moreover, attempts by the main left-leaning opposition parties, uMkhonto weSizwe and Economic Freedom Fighters, to block legislation could increase instability.”

The firm further said the election results – which saw the ANC lose its majority for the first time in 30 years – indicate increasing public frustration over deteriorating economic conditions, poor service delivery, the legacy of state capture, and high inequality and unemployment. 

In 2023, South Africa’s GDP per capita was $6,200 (R112,432 at today’s exchange rate), remaining below 2006 levels. 

At the same time, gross general government debt has steadily increased to 76% of GDP in 2023 from 45% a decade ago, while interest costs are just below 20% of government revenues. 

“This high interest burden and social spending constrain the government’s capacity to deal with any new economic emergencies,” the firm warned.

S&P expects South Africa’s real GDP will increase by 1.1% in 2024 and an average of 1.3% from 2025 to 2027, from 0.6% in 2023. On a per capita basis, real growth will be about zero this year.

“Our sovereign rating on South Africa continues to benefit from deep local currency capital markets and limited foreign-currency and external debt,” the firm said. 

“Despite institutional setbacks, the country demonstrates several strengths, including the recent peaceful political transition following elections, durable checks and balances among institutions, and a credible and independent central bank and judiciary.”

Cautious optimism

Old Mutual Wealth investment strategist Izak Odendaal said that while a coalition government that includes the ANC and the DA will boost South African assets, this will be temporary. 

He explained that the market will wait for evidence of accelerated reforms and growth before heavily investing in the country. 

The main question is whether South Africa gets an acceleration of growth-enhancing economic reforms, fiscal discipline, increased emphasis on the fight against crime and corruption, and improved delivery of basic services. 

Populists and ideologues always reach for silver bullets, but there are none. Fixing South Africa requires the hard and tedious work of getting the basics right every day.

It appears as though President Ramaphosa understands this, urging any new government to continue the reforms his administration has initiated. 

Ramaphosa’s administration has undertaken reforms, including liberalising the electricity sector and increasing private participation in the country’s logistics. 

“Regardless of the form or composition of the incoming administration, it is important that the momentum of reform be retained and sustained,” Ramaphosa said.

“A change in direction would derail the positive progress that has been made and take us back to the starting blocks.”