South Africans Head to Polls with ANC’s Majority at Risk
South Africans are set to vote in a crucial national election on May 29, marking a pivotal moment for the nation as the ruling African National Congress (ANC) faces the potential loss of its parliamentary majority for the first time since the end of apartheid 30 years ago. Investors worldwide are closely monitoring the outcome, given its significant implications for the country’s economic future.
Importance of a Parliamentary Majority
A parliamentary majority is crucial for the ANC to govern without forming coalitions. Falling short of 50% support would compel the ANC to partner with other parties to maintain control of Africa’s most industrialized economy. The newly elected parliament will also have the responsibility of choosing South Africa’s next president, thereby influencing the direction of fiscal and economic policies for the next five years.
Investors are keen to understand whether the new administration will pursue a leftist agenda, maintain the status quo of gradual reforms, or adopt a more business-friendly approach. Each scenario carries different implications for the country’s economic landscape.
Investor Focus and Concerns
Recent polls, including an April Ipsos survey, suggest the ANC might secure around 40.2% of the vote, with most estimates placing it below 45%. Financial analysts believe the ANC needs at least 45% to form a coalition with centrist parties. Without this threshold, the ANC may have to negotiate with far-left parties like the Economic Freedom Fighters (EFF) or the economically liberal Democratic Alliance (DA).
“The market is watching very closely to see the degree to which the ANC… [is] forced to engage in coalitions with what are perceived to be extremely left-wing parties such as the MK (uMkhonto we Sizwe party) and EFF,” said Yvette Babb, a portfolio manager at U.S.-asset manager William Blair Investment Management. A coalition with these parties could introduce more checks and balances but also lead to policy shifts that worry investors.
Market Reactions
Post-election coalition talks between the ANC and EFF or MK are expected to trigger a “kneejerk” sell-off of South African assets due to fears of a populist shift and increased social spending, warned Mpho Molopyane, chief economist at Alexforbes. Conversely, a coalition with the DA could spark a “risk-on rally,” boosting investor confidence in a business-friendly government committed to fiscal prudence.
Impact on the Rand
The South African rand, reflecting the country’s economic challenges, has weakened year-to-date and recorded annual losses exceeding 5% over the past four years. The current rand-U.S. dollar exchange rate suggests a relatively small election-linked risk premium, indicating a general expectation of a benign election outcome that ensures policy continuity, according to Elna Moolman of Standard Bank.
Economic and Investment Outlook
South Africa’s economy has struggled with minimal growth, exacerbated by power cuts and infrastructure issues. The economy grew just 0.6% in 2023. Despite the lack of comprehensive plans from political parties to stimulate economic growth, certain sectors, such as gas, renewables, and mining, remain attractive to foreign investors.
Net foreign direct investment (FDI) inflows have been higher since the ANC took power in 1994, reaching $9.19 billion in 2022 compared to $374 million in 1994. However, foreign investment in domestic government bonds has declined significantly, from a peak of 42.8% in 2018 to under 25% this year.
Challenges for international businesses in South Africa include infrastructure deficiencies, skilled worker shortages, financial sector transparency concerns, and delays in obtaining permits for foreign workers. Nevertheless, the country’s diversified economy, market volume, free press, and independent justice system continue to make it an attractive investment destination in Southern Africa.
As the election approaches, investors and businesses remain in a state of cautious anticipation, aware that the outcomes will shape South Africa’s economic trajectory for years to come.
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