But the process will also be complicated by the need to form coalitions in three of South Africa’s nine provinces – Gauteng, KwaZulu-Natal, and the Northern Cape. From Moneyweb.
A coalition between the ANC and the Democratic Alliance (DA) is the most likely outcome of last week’s election, which saw the ruling party’s share of the national vote slip to 40.2% from 57.5% in the previous election in 2019.
An analysis by BMI Country Risk & Industry Research does not discount the possibility of the ANC hitching up with one or more of the left-leaning parties, such as the uMkhonto weSizwe Party (MKP) or the Economic Freedom Fighters (EFF), but argues that a coalition with the DA, or a broader government of national unity similar to that of the mid-1990s, would allow the government to keep its key policy framework intact. It would be welcomed by markets and marginally improve SA’s economic outlook.
BMI is a Fitch Solutions company and is part of the broader Fitch Group. The research house pointed out that the commentary in its note on SA is not from Fitch Ratings’ Credit Ratings and that Fitch Ratings analysts do not share data or information with BMI.
A coalition with the DA could also see the rand claw back some of the 2.5% loss it suffered against the US dollar since election day on 29 May, says BMI.
Eurobond yields increased 3.4% since the election, rocked by the disastrous performance of the ANC and the rise of MKP, which won 14.58% of the national vote on a populist campaign in support of former president Jacob Zuma. The left-leaning MKP has promised to nationalise the mines and banks.
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The DA, with nearly 22% of the vote, is the second largest party, followed by MKP, which scored particularly well in Zuma’s home province of KwaZulu-Natal.
The ANC must announce the new coalition by 16 June, and parliament must convene for its first session, at which point it will swear in members and elect a president.
If this deadline is not met, new elections must be held.
Budget ‘first key milestone’
The process will also be complicated by the need to form coalitions in three of South Africa’s nine provinces (Gauteng, KwaZulu-Natal, and the Northern Cape).
“The first key milestone for the new government will be the 2024/25 budget, which must be passed by the new government by the end of July,” says BMI.
A DA-backed government would likely push for some fiscal tightening in the budget for the current 2024/5 year as a way for the party to demonstrate its budgetary muscle. Any efforts to streamline spending may be well received by the markets, but interfering with key line items such as wages and grants may get a negative reaction from the traditional ANC voter base that may be suspicious of supporting a DA-backed government, adds BMI.
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A DA-backed government would almost certainly push for an improved business environment and pro-growth strategies.
The DA manifesto says the party will streamline disability and social relief grants, set up one-stop shops for small businesses, break up Eskom’s energy generation, and reduce business regulation, such as the B-BBEE Act – often cited as a reason for SA’s relatively poor inward investment flows.
Should the ANC look left and tie up with MKP or the EFF, this would slow fiscal consolidation efforts and worsen SA’s long-term growth prospects, says BMI. This would also cause the rand to fall further.
“The decline would be particularly sharp if the coalition replaced President Cyril Ramaphosa with a more left-wing member of the ANC, such as Deputy President Paul Mashatile.”
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A weaker currency would raise inflation and force the South African Reserve Bank (Sarb) into a more hawkish policy.
A short-term 10% fall in the ZAR/USD exchange rate would likely push inflation from 4.5% to 5.5%. That could prompt the Sarb to raise interest rates by another 100 basis points, leaving the economy 0.3 percentage points smaller in 2026 and 2027 than it would otherwise have been.
Strong support for ANC-DA coalition
Meanwhile, independent research group Capital Economics says the chances of an ANC-DA alliance increased over the weekend but warns that the partnership may be fragile, as has been the case in other areas, such as Tshwane and Nelson Mandela Bay, where coalitions between often mutinous rivals have been cobbled together.
The focus of an ANC-DA coalition would be on tackling growth and public finance problems, more so than a coalition with MKP or EFF.
A survey by the Social Research Foundation finds strong support for a coalition from both the DA and ANC as “the only way to secure a stable government that delivers if no party gets 51%”.
Both parties also seem to feel that there are some good people and good policies in the ANC and DA that would give SA its best shot at a stable and prosperous future.
Should the ANC partner with MKP, which has yet to publish plans for how it intends to pay for election promises such as a basic income grant, the budget deficit would likely remain wide at about 4.5%.
In the longer term, efforts to pursue economic nationalisation would hamper the country’s attractiveness to investors and weigh on growth prospects, says BMI.
