Million rand question for South African investors

The number one question most investors will be asking themselves in South Africa is whether the Government of National Unity (GNU) can last. 

The GNU is central to the ongoing positivity surrounding South Africa, with the country being in a much better position now than it was just twelve months ago, Old Mutual Wealth investment strategist Izak Odendaal said. 

It hasn’t been smooth sailing since then, and the past week saw serious friction between the largest parties was clear for all to see.

There are deep disagreements between the coalition partners on a handful of policy areas, particularly National Health Insurance, but broad agreement on the rest, Odendaal explained.  

The coalition is perhaps stronger than it appears from the outside since the parties need each other and find the alternative populist scenarios unappealing, though for differing reasons. 

However, they must also maintain individual identities and keep their internal audiences onside. 

Nonetheless, the number one question most investors will be asking themselves is whether the GNU can last, at least until next year’s municipal elections and the ANC’s internal elections in 2027. 

Odendaal believes that, as South Africa is the G20 host this year, all parties involved will avoid global embarrassment over petty political infighting.

However, betting on politics is extremely risky, and it is very difficult to make investment decisions based on political change. Anything can happen. 

Instead, Odendaal said investors should focus on the reforms underway that will raise the economy’s long-term growth potential and could survive the GNU if it does collapse. 

Many of these pre-date the formation of the GNU, such as the substantial restructuring of the electricity market. 

Though this weekend saw an unwelcome break in the 311-day load-shedding-free streak, such incidents will probably be sporadic. A return to the highly disruptive load-shedding intensity of 2022 and 2023 is very unlikely.

Large-scale private investment spending has been unlocked in the energy sector, and it will continue until the end of the decade. 

The same is likely to happen in the logistics space, as well as bulk water provision. This can crowd in local and global capital.

Even if the GNU doesn’t survive in its current form, we are unlikely to revert to the world of vertically integrated state-owned monopolies. Those were 20th-century business models that should not have persisted so deeply into the 21st, Odendaal said. 

In a recent report following its consultations with the National Treasury and the Reserve Bank, the International Monetary Fund (IMF) outlined how much the GNU has changed South Africa’s economic outlook. 

The institution said if the GNU manages to survive and implement the reforms necessary, this could be a vital turning point for South Africa. 

It explained that it is crucial that the parties in the GNU agree on three key priorities – driving economic growth, reducing poverty, and building a capable state. 

However, there are questions about whether GNU partners can overcome their historical differences and opposition from strong vested interests and garner sufficient social support to implement the reform agenda. 

Moreover, international evidence on the success of multi-party coalitions is unclear. While some end up in gridlock, others can be conducive to stability and reform through broad support.

So far, the IMF has said that 60% of the population believes the GNU is working well.  

Markets have also welcomed the formation of the GNU, with the exchange rate appreciating, bond yields declining, and stock market valuations increasing. 

With the GNU remaining committed to reform, the IMF believes that there are tentative signs of an economic recovery. 

However, the IMF is not riding high on this optimism and remains cautious about South Africa’s economic future, given global uncertainty and local reforms taking longer than expected. 

The institution’s assessment showed that the balance risks remain tilted to the downside. As a result, its forecast for South Africa’s economic growth is below consensus at 1.5% in 2025. 

Concerningly, the IMF does not believe that the current trajectory will result in a rapid uptick in economic growth, a reduction in unemployment, and a slowdown in the growth of government debt. 

Its baseline projection shows that economic growth will hover around 1.7% annually until 2030, with unemployment marginally declining to 31.3%. 

One of the bright spots in South Africa, the National Treasury’s fiscal consolidation, is also expected to come under pressure. 

The IMF projects that gross government debt as a per cent of GDP will rise from 75.7% in the current financial year to 85.6% in 2030. 

This is due to a combination of slow economic growth and increased spending pressures from ambitious government proposals.

The below graphs, courtesy of the IMF, show the positive impact the formation of the GNU had on South Africa’s financial markets.