What can we expect after election day?

Our base case is for the African National Congress (ANC) to garner somewhere between 42% and 49% of the national vote, and our view is that the result will possibly be closer toward the top-end of the band (49%). The implication is that the ANC should easily find a coalition partner, and the status quo persists.

However, this is all dependent on how close to 49% the ANC gets. The ANC may find it harder to stick to fiscal discipline as the number of needed coalition partners increases.

This implies that the risk premium on South African debt and the rand will persist unless or until a coalition demonstrates it can govern effectively.

Most likely scenario… ANC (42% to 49%)

SA elections:

The consensus view, based on multiple polls, is that the ANC will be below 50% for the first time in South Africa’s democratic dispensation. The ANC getting below 50% implies a changing political landscape, similar to 2016 when the ANC lost several major metropolitan municipalities due to various coalitions being formed across the political spectrum.

South Africa joins a raft of countries heading to the polls this year with an estimated 49% of the world’s population electing leaders in one form or another. Like the rest of world, the elections will have significant implications for South Africa’s policy direction on multiple issues which are of market significance. Of significance within the South African election context are the following:

• Expropriation of land without compensation;
• Nationalisation of key components of the economy (e.g. mines and banks, etc);
• Nationalisation of the South African Reserve Bank (SARB);
• Institutional independences (SARB, NPA, broader criminal justice system, SARS, etc);
• Fiscal policy;
• Structural reform (i.e. Eskom, Transnet, Operation Vulindlela); and
• Foreign policy

There has been an establishment of a Multi-Party Charter by approximately 11 opposition parties that seek to unseat the ANC from power if the ANC gets less than 50% of the vote. Polling suggests that the Multi-Party charter may garner up to 35% of the vote. That is well below the 50% plus one vote threshold to have full control of the National Assembly and Parliament.

Incorporated in our analysis is the electoral disruption of the establishment of the Mkhonto WeSizwe Party (MKP) in December 2023, which is now led by former ANC President Jacob Zuma. The MKP is expected to fragment electoral outcomes, particularly in KwaZulu Natal and in Gauteng. Current polling suggests around 11% of the national vote for MKP.

1.  What are the polls telling us?

As mentioned in the prelude, the ANC is currently polling at 41%, the Democratic Alliance (DA) is expected to grow, the Economic Freedom Fighters (EFF) remain relatively unchanged while the MK Party is making significant gains in their first election to garner 11% of the vote. The Multi-Party Charter is expected to get around 35% in the poll case scenario (chart 1).

Chart 1: Average polling amongst major political parties

The national and provincial elections in 2019 were accurately forecast by polls at the time. This implies that we should take the polls seriously as we head into elections (chart 2).

Chart 2: 2019 polls versus outcomes

But it is important to note that despite what the polls are telling us, the ANC would have to suffer extensive losses for the polls to be accurate. If the ANC is to fall to around 40% of the national vote, this implies that the ANC would have suffered a near 18 percentage point decline in support. In all previous elections, the ANC has at most lost around 4.5 percentage points at the polls (chart 3). Whilst the impact of loadshedding, high inflation, high interest rates, etc have been felt extensively amongst the population, it is important to keep this in the back of our minds. In our view, the ANC will trend towards 40% but our base case is for the ANC to garner around 48% at the polls which implies a 10 percentage point decline in support (double the previous worst support base decline).

Chart 3: Election historic declines and projections

In summary:

• Elections are particularly difficult to predict. The ANC getting around 40% at the polls implies a significant decline in support (which implies a 30% drop-in overall ANC support relative to 2019). A drop of that magnitude doesn’t seem likely. However, as unlikely as it is, that is the key tail-end risk.
• We need to be aware that not all polls are completely independent. There is similarly large variability between what the pollsters are saying individually, and potentially the quality of the polling and data collection methods.

2. On the structural reform programme

The ANC over the last few years has undertaken an economic reform programme that has included taking responsibility for myriad structural issues in South Africa. There has been institutional strengthening at the South African Revenue Service (SARS), National Prosecuting Authority (NPA), the office of the Public Protector, amongst others. There is also evidence that the government is making headway with the structural reform programme, particularly at Eskom and at Transnet. It is likely that the structural reform will continue even if the ANC gets below 42%, however, the mechanisms used to implement the programme may be impacted (i.e. private sector participation, public private partnerships, etc).

The administration has entrenched reform and to a large extent, implemented reform that is difficult to unwind (Link: Green SOE shoots emerge after pruning state capture graft).

The structural reform programme has been one of the drivers of the performance of the rand against the US dollar (chart 4) and the performance of South African government bonds. Our SOE index (chart 5) shows a sustainable improvement in the performance of SOEs (although we have a long way to go). Of late, we have seen improvement in the Energy Availability Factor (EAF), reaching its highest levels (around 70%) since 2021 a few days ago. Backlogs at ports have, in part, been dealt with as we saw top percentile performance in terms of containers moved in March. We have also seen continued improvement of rail, although more work remains to be done.

Chart 4: Rand performance

Chart 5: Investec Wealth & Investment International SOE performance index

Any threat to the continuation of the structural reform programme would have negative implications for the currency and South African government bonds. Incremental structural improvements in the broader economy bode well for our GDP outlook, and stronger GDP growth is similarly good for our debt to GDP trajectory (chart 6) - any upward revisions to GDP growth would lead to downward revisions to the debt-to-GDP trajectory.

Chart 6: SA debt-to-GDP trajectory

3. On property rights and institutional independence

The threat around property rights and institutional independence will be most pronounced if the ANC garners 42% or less of the national vote. Other parties have unequivocally called for the expropriation of land without compensation, nationalisation of key components of the economy, nationalisation of the SARB, etc.

The only scenario in which property rights and institutional independence will remain protected in the event of the ANC getting below 42% of the vote is if the ANC enters into coalition with the DA.

4. Constitutional ambiguity going into the election

The first sitting of the National Assembly (NA) must take place within 14 days after the national election result has been declared. The President’s term will end when the next president is elected by a majority (50% +1) of the NA. It is not clear what will happen if Parliament can’t elect a new President within 30-days (potentially new elections). Therefore, if the ANC does go below 50%, the establishment or non-establishment of a coalition will have material implications for the process of electing the President and whether South Africa would have to go back to the polls. This is one area where significant uncertainty (an inability to elect a President) will impact financial markets.

5. On fiscal policy

There is a raft of evidence across developing markets showing that coalition governments typically lead to greater deficits¹ and increased government spend as each coalition partner aims to extract finances to promote their interests/portfolio. This implies that the more coalition partners there are, the higher the deficit. Therefore, as the ANC incrementally approaches the 40% level, it would need more coalition partners and therefore this would be negative for our fiscal trajectory.

Based on the Budget Speech in February 2024, it seems that the ANC is aware of the fiscal risk of coalitions – and is looking to put in place a fiscal rule to bind future coalitions (i.e the proposed fiscal cap proposed in the Budget speech).

However, the fiscal cap rule will likely only need 50% or more to be overruled so this would probably be the first target of a coalition.

6. On coalitions in general

There is also a raft of evidence across developing markets showing that the strength of a coalition agreement has significant implications for the performance of the coalition and the policy environment. Therefore, in addition to looking at the number of coalition partners, we would need to look at the strength of the coalition agreement.

A strong coalition agreement would lead to more certainty on South Africa’s overall policy direction and should be good for markets in general. However, this is incrementally more difficult to achieve when there are many coalition partners.

7. Our scenarios

ANC >50%, more of the same.

Given recent reform expect improvement in GDP, risk premium in SA debt. Given polls projections, this outcome seems unlikely.

ANC 42%-49%.

ANC will find it difficult to stick to fiscal discipline. The risk premium in SA debt and the rand persists unless or until a coalition demonstrates effective governance. Given the polls and our analysis of the likely electoral support drop, this is the most likely scenario.

ANC<42%.

The overall impact is unknown. There would be a small chance that a government cannot be formed. Coalition with EFF unlikely to be >2/3rds so limited risk of change to the Constitution. A minority government will make it impossible to stick to fiscal target. Threat of motion of no confidence in the President raises risk premium in SA – reflected in higher bond spreads, weaker currency. Coalition with DA still carries this risk, however, a coalition with the DA will be well received by the market. Second most likely scenario, given polls projections.

With MKP/EFF

With DA

References

[1] Impact of governance on budget deficit in developing economies 

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