South Africa faces a massive shake-up in 2024
South Africa, like many other countries worldwide, will be having general elections this year, which could be good or bad for businesses across the country.
This year’s elections are incredibly relevant for investors, as the chance of a change in government – whether outright or through coalitions – impacts business and consumer confidence, asset prices and investment returns.
With the ANC widely expected to lose its outright majority, RMB Chief Economist Isaah Mhlanga said that a coalition government is likely.
This could see the ANC partner with the DA, EFF or any smaller parties, which could see the country’s political leanings fall somewhere in a wide range – from pro-economic reforms and business-friendly to more populist.
“If a new government comes about and is viewed as business-friendly – in that its policies aim to create a conducive environment for business to thrive – markets are likely to rally to price in the good news,” Mhlanga said.
“However, if a new government is viewed as populist and anti-business, markets will likely sell-off to price in the bad news.”
This is the general sentiment of the possible outcomes:
- Business-friendly: AND and DA coalition = positive market outcome
- Populist: ANC and EFF coalition = negative market outcome
- More of the same: ANC and smaller parties coalition or an outright ANC win = no market impact
Bank of America’s economists said that the status quo will likely remain intact as the ANC holds onto power with the help of several smaller parties.
Elections impact on markets
To see how elections affect markets, Mhlanga investigated South Africa’s monetary policy, fiscal policy and the rand’s performance during election years.
Since 2000, the South African Reserve Bank has slashed interest rates in seven of the past ten local and national election years.
Although this would suggest that the SARB is biased towards cutting rates during election years, Mhlanga said that this is not the case, as the SARB is mainly concerned with tackling inflation.
Apart from the 2000 local government elections, where inflation was above the central bank’s target, inflation is within the SARB’s 3%-6% target band, encouraging cuts.
“The evidence, thus, does not support a view that elections influence monetary policy decisions, which is in accordance with the SARB’s constitutional mandate to maintain price stability without fear, favour or prejudice,” he said.
In terms of the fiscus, the deficit improved in five (2000, 2004, 2006, 2011, 2016) of the last nine elections (general and local government), widened in two (2009 and 2019) and remained relatively unchanged in 2014.
Although the 2009 fiscal deficit widened due to the response to the global financial crisis was justified, there is less justification for 2009. This suggests that fiscal decisions have some influence over elections.
“In aggregate, there is no strong evidence to suggest that fiscal policy is driven by political considerations during election years. However, the widening deficit in 2019 and 2024, when peer countries are consolidating, might suggest a change in fiscal response and political influence,” he said.
When looking at the rand, there are significant variances. The rand dropped in seven of the ten election years (1999, 2000, 2006, 2011, 2014, 2019 and 2021), with an average drop of 9.2%.
In general, there seems to be a recovery in the rand post elections, which suggests that currency markets tend to price in political risks ahead of an election and unwind it after elections.
However, the Rand appreciated in 2004 (20%), 2009 (27%), and 2016 (8%).
The 10-year bond yields dropped by an average of 15 basis points during elections and an average of 68 basis points when considering the years where they declined (2000, 2004, 2011, 2014, 2016 and 2019).
In the years where they increased (2006, 2009 and 2021), they rose by an average of 89 basis points.
“In essence, yields decline more frequently than they rise, but the rise is much more pronounced than the decline,” he said.
“Either way, for both the currency and 10-year bond yield, the historical experience suggests two-way risk, a rally or sell-off. This year is unlikely to be different given that for the first time since the dawn of democracy, we are facing the prospects of a coalition government at a national level, which might come with noticeable changes in national policy settings.”
Read: 24 jobs in South Africa that pay over R2 million in 2024
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