Sovereign Africa Ratings

Post-2024 RSA General Elections: Insights into the South African Economy and Financial Markets

The outcomes of South Africa's general elections show that citizens hold their government accountable for the status of the national economy and financial markets. It is widely known that the once powerful ruling party, the African National Congress (ANC), received only 40% of the vote, ushering in a new era of a coalition government or government of national unity on a national scale. These results provide a strong message that voters wield power by exercising their democratic right to punish incumbents for perceived shortcomings in economic management. In the words of Theodore Roosevelt, "a vote is like a rifle; its usefulness depends upon the user." South Africa, like its fellow BRICS member state India, is preparing to form a coalition government. For South Africa, this development involves entering the proverbial uncharted waters.

Navigating Economic Dynamics: South Africa’s 2024 Election Implications

Business Confidence: Uncertainty about the effectiveness and stability of a coalition government may harm business confidence. Businesses desire dependable and stable governance when making long-term investments.

Investor Confidence: Like business confidence, investor confidence is critical to economic success. A coalition government, which may create policy uncertainty, can discourage investors, harming stock market performance and general economic health.

Macroeconomic and Fiscal Policy: Coalition governments frequently struggle to maintain clear and consistent macroeconomic and fiscal policies due to competing party goals, which can have an impact on economic stability and growth.

Financial Market Stability: The stability of financial markets is strongly dependent on predictable and stable governance. The formation of a coalition government may cause volatility if there are substantial differences or instability within the alliance.

Political Stability: The stability of the political environment is essential. Coalition governments may face internal conflicts and power struggles, resulting in political instability and ineffective governance.

Foreign Policy Stance: A coalition government may struggle to present a coherent foreign policy, thus undermining South Africa's international position and diplomatic ties.

Central Bank Independence: The independence of the South African Reserve Bank is critical to ensuring economic stability. Political pressures from a diversified coalition could undermine this independence, resulting in less effective monetary policy.

Institutional and Governance Integrity: Effective governance and strong institutions are essential for a country's prosperity. A coalition government may experience difficulties in preserving these due to the need to accommodate different party interests.

Sovereign Debt: Political instability and probable policy inconsistency can lower the country's credit rating and raise borrowing costs, increasing sovereign debt difficulties.

Navigating South Africa’s Economic Hurdles

The South African economy faces tight monetary policy, limited fiscal space, and negative consequences from rising economic challenges such as high oil prices, supply chain disruptions, food price inflation, high unemployment, income inequality, slowed investment growth, and reduced direct investment. Furthermore, inefficiencies in transportation networks, power and water shortages, and unethical business practices (both private and governmental sector corruption) continue to devastate the economy.

The government's budget constraints necessitate austerity policies such as greater taxation or the restriction of certain public services (and thus public sector jobs), as well as lower income (either directly from transfers or indirectly through diminished economic demand). The question is whether the parties in a coalition government will fully support such policy measures.

On the other hand, would coalition parties advocate for expansionary policies to stimulate demand? Or would they assess the benefits and drawbacks of fiscal policies that may increase the risk of default, thus jeopardising domestic financial stability? Default might provide a negative shock to the home economy, with ramifications for local bank balance sheets that would most likely result in widely felt economic damages. Leaders and citizens will bear the brunt of any financial, economic, and political instabilities, as well as the negative consequences of default.

It is important to highlight that under all political systems or forms of government, the tax-paying masses are held accountable for the debt. In an unstable and weak governance system, any consumption loss results in a significant utility loss for both leaders and citizens. Election concerns drive reasonable and forward-thinking elected leaders to internalise this utility loss to eventually form a stable and well-functioning coalition administration. However, other parties in a coalition system may be less sensitive to citizens' plights and hence less eager to promote economic, financial, and political stability.

Navigating Challenges in Multiparty Coalitions

One of the most difficult challenges that parties in multiparty governments face is developing policies together and overcoming the possibility of policy stalemate. Coalition governments bring together political parties with differing, and sometimes opposing, policy interests to compete for government positions. This frequently leads to politically unstable governments that struggle to enact policy improvements.

Governance and policymaking in multiparty governments provide numerous obstacles, particularly due to diverse policy preferences among coalition partners. This dilemma is compounded by the presence of a jurisdictional system in which cabinets delegate significant policymaking authority to individual ministers. Parties in authority of a ministry have a major advantage in terms of policy-specific resources and gatekeeping power. Given that partners' policy preferences differ, ministers have great incentives to use this advantage to advance their own party's interests in the policymaking process.

A coalition agreement involving a sub-spatial policy program could increase a government's policymaking productivity. The extent to which coalition agreements can promote high policymaking productivity is determined by the viability of policy compromises and the cost of breaking away from them. Coalition governments that have documented and publicly stated policy agreements outperform coalitions that do not have such contracts in terms of reform productivity.

Impact on South Africa’s Majority: Election Outcomes

Previously disadvantaged populations in South Africa can gain from a coalition government that prioritises service delivery and poverty reduction. Despite numerous initiatives, a large proportion of previously disadvantaged populations continue to face extreme poverty, unemployment, and inequality. A coalition administration has the potential to find a compromise between different policy preferences while also addressing key concerns like economic marginalisation.

Effective coalition governance can use the strengths of multiple political parties to implement comprehensive and inclusive policies. This is especially relevant in South Africa, where economic growth has stalled and unemployment is rampant, maintaining low-income per capita indicators.

Thus, a well-structured coalition government that is committed to social and economic reforms can serve as the foundation for equitable growth and development.

Key Takeaways: South Africa’s 2024 Election

It should be highlighted that politicians in South Africa's coalition government should avoid pushing distributive costs ahead by supporting existing fiscal policy with sovereign borrowing. Credit enables incumbents to reward supporters without immediately deducting domestic revenue. Excessive borrowing will result in a larger debt burden, greater interest repayments, higher interest rates, and perhaps market exclusion.

Borrowing in South Africa should be used toward fixed capital formation for infrastructure projects such as roads, seaports, airports, water, energy, telecommunications, and rail enhancements. These initiatives have larger economic growth externalities and employment multipliers.

There is considerable evidence that parliamentary democracies produce better borrowers because the legislature can limit the executive's power, requiring it to credibly commit to its obligations and respect creditors' property rights. Policy consistency and stability, not regime type, explain country risk.

While an ANC-led government will most certainly be able to follow its largely business-friendly policy agenda, a diminished mandate implies it may lack the political capital to implement difficult reforms.

Regime change can have an impact on national credit risk because it alters the political and institutional environment, policy direction and priorities, legal and regulatory framework, and international relations of a country or area. Regime change can also have an impact on the borrower's obligations and commitments, as a new regime may elect to honour, renegotiate, or default on existing contracts or debt.

South African coalition governments must exercise caution when it comes to excessive sovereign borrowing, as this can lead to rising debt burdens and economic instability. Borrowing should be focused on infrastructure projects that provide significant economic and employment benefits. Parliamentary democracies, which include legislative balances on executive power, tend to manage borrowing more effectively. Political stability and policy consistency are critical for maintaining a favourable country risk profile. Regime changes can have a substantial influence on credit risk because they alter the political and institutional landscape and affect current financial commitments.