The worst-case election result that would send investors running

 ·29 Feb 2024

The rand is in the doldrums because of anxieties tied to the 2024 elections – but a dreaded ANC/EFF coalition could see it crumble if it ever became a reality.

Following the better-than-expected Budget last week, the rand strengthened slightly to R18.76/$.

However, it has since dropped to below R19.00/$ amid expectations that the US interest rate cycle may be pushed back. It currently sits at R19.23/$ at the time of writing.

Rand/US Dollar

The rand is facing serious pressure, but there may be greater problems on the horizon.

Many polls in South Africa see the ANC support in the upcoming elections dropping below 50%, with the party needing a coalition partner to help it get a majority.

One potential coalition partner is the EFF, which would be the worst possible result for the economy and the rand.

Investec Chief Economist Annabel Bishop said that ANC/EFF coalition leads the finance group’s severe down case, which sees an increased likelihood of debt default due to excessive state expenditure, while corporates leave the country over the EFF regime, resulting in mass job layoffs.

Corporate, high-income earners and VAT on their spending are the key taxpayers and fund most of the state’s expenditure.

This private sector collapse would destroy the banking and financial services sector.

“Foreign appetite for South African debt has already dried up considerably since the end of the 2000s, as South Africa’s borrowings escalated sharply, and its creditworthiness declined. An ANC/EFF coalition would see even further negative foreign investor sentiment,” Bishop said.

“The bulk of financial market investment comes from the Western Hemisphere, and South Africa would lose out on this funding, both to issue new debt as highlighted above and to roll over existing debt.”

Government expenditure sits at close to R2 trillion, and a massive increase in this under the EFF’s election promises would result in the country going bankrupt, with a debt default. This would deter foreigners from making any investments.

“Even selling off South Africa’s mining rights to foreigners is unlikely to engender this. South Africa needs trillions to sustain its current expenditure; a few hundred billion would not be enough as envisaged in an EFF sovereign wealth fund,” Bishop said.

“Markets worry election promises of the EFF don’t add up fiscally, and even the ANC’s ones may be a stretch, as Fitch highlights.

Bankrupt South Africa would also not have enough money to pay for social grants – which help 28 million people in need across the country – and civil servant wages.

As per the severe down case, Investec predicts that the rand will drop to R21.50 by the end of 2024 and weaken even further to R22.10 from 2025.

Luckily not likely

Despite these fears, Investec’s economic scenarios only assume that there is a 9% that the severe down case will actually occur.

The base case, which includes 2.0% GDP growth over five years, a modest transition to renewables and a temporary greylisting, has a 45% chance of occurring.

This would see the rand strengthen to R17.70 by Q4 2024 and stay around that level until the end of 2025.

Alex Forbes and Bank of America said that they expect the ANC to form a coalition with smaller parties and not the DA or EFF, resulting in the national status quo being largely maintained.

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