Warning over major coalition risks for South Africa – even if it’s ANC and DA
Fitch International research company BMI has warned that coalitions between the ANC and the biggest opposition parties hold significant risks for the country – even the more “favourable” tie-up with the Democratic Alliance (DA).
The researchers noted that in the unlikely scenario that the ruling African National Congress’ (ANC) vote share falls to 40% or below in the upcoming general elections, a coalition between the ANC and South Africa’s main opposition parties could be on the way.
But the risks these tie-ups carry include the possibly of social unrest in an ANC-Democratic Alliance (DA) coalition as a result of possible labour and social reforms, while an ANC-Economic Freedom Fighters (EFF) could see a “wider fiscal deficit, slower real GDP growth, and a weaker rand.”
In a recent pre-election discussion hosted by BMI Research, analysts outlined their findings and research covering South Africa’s May 29th elections.
They believe that while the ANC will lose its parliamentary majority, it will still have significant influence over policy proposals.
The analysts think it is most likely that the ANC will form a coalition with smaller parties at a national level after falling ‘just short’ of a majority (45% or above).
The Inkatha Freedom Party (IFP) is seen as the most likely partner.
In the case that their support dips even further than this, Lara Wolfe and Derrick Botha from BMI analysed how an ANC alliance with either the DA or EFF could affect South Africa’s fiscal policy, foreign relations, economic growth, and currency.
Currency implications
ANC-EFF: In the immediate term, BMI believe that “the announcement of an ANC-EFF coalition would almost certainly result in the rand falling sharply against the dollar.”
They said that the prospect of an ANC-EFF coalition “would deter investors, exacerbating already low risk appetite.”
BMI said that the reason for this is because “the EFF’s stance on increasing business regulation and union support (such as promising to ensure 50% of the labour force is unionised) would weaken the attractiveness of South Africa as an investment destination, weighing on portfolio and foreign direct investment.”
However, after initial shocks to the economy, they expect that the currency would make up most of these losses by the end of 2024.
This is only if key economic policies are not altered and ‘left-wing’ factions are not in the driving seat.
ANC-DA: This coalition also presents its risks, as “uncertainty among investors due to potential policymaking slowdowns,” may shake the rand.
However, if collaboration does prove effective, South could see the rand outperform current expectations.
BMI said that this is because “DA-led reforms to streamline business regulation (such as pushing to reform the Labour Relations Act) could attract more private investment.”
However, BMI add that “such reforms (on labour and race-based policies) might spur social unrest, leading to increased volatility of the rand.”
Wolfe also said that extreme reforms to South Africa’s social grant systems also presents the risks of unrest.
Economic growth implications
ANC-EFF: “Pressure from the EFF to increase social transfers would provide moderate support for household spending, although South Africa’s persistently high unemployment rates will continue to suppress private consumption growth,” said the analysts.
BMI expect a reduction in fixed investment as government capital expenditure is likely to be overshadowed by elevated recurrent spending demands.
“Additionally, a decline in business confidence could dampen private investment,” added the analysts.
ANC-DA: “Pressure from the DA to implement pro-business reforms and streamline grants – which could support [Godongwana’s] calls to consolidate social spending – should provide room for an uptick in infrastructure investment,” said BMI.
“Initiatives to cut bureaucratic hurdles and establish ‘one-stop-shops’ for small businesses will likely boost fixed investment by making it easier for businesses to operate,” they added.
Fiscal policy implications
ANC-EFF: Citing the EFF’s manifesto, Wolfe said that the EFF would likely push for higher recurrent and capital spending, resulting in increased borrowing and a larger role of the state in the economy.
Although BMI thinks that the EFF’s push for the nationalisation of mines, land, and banks may not succeed, its influence could see more funding directed towards state-owned enterprises (SOEs), aligning with its plans to enhance Eskom and support SOEs.
However, “challenges in curtailing the burgeoning public sector wage bill and high social transfers would persist,” said the analysts.
ANC-DA: BMI says that this coalition scenario “would likely see a more pronounced reduction of the fiscal deficit than we currently forecast.”
The DA would increase pressure on the ANC to reduce the number of ministers and streamline grants, potentially delaying the implementation of a basic income grant, which could lead to societal pushback.
However, there will be friction in this regard, as “the DA’s commitment to avoiding new taxes and adjusting tax brackets for inflation are contrary to the ANC’s efforts to bolster revenues,” said the analysts.
Foreign policy implications
ANC-EFF: “An ANC-EFF government would likely align South Africa more closely with left-leaning factions within the ANC, fostering greater cooperation with Russia and Mainland China,” said BMI.
The analysts say that this shift could exert strain on relations with a major trading partner, the United States (US).
ANC-DA: “The DA is more ideologically aligned with the US and the [European Union], with an ANC-DA coalition therefore likely to result in less foreign policy discord between South Africa and the US,” said BMI.
The analysts also looked at the implications it may have on the continent, saying that “the DA has been highly critical of the deployment of South African National Defence Force troops to conflicts in Southern and Central Africa.”
“Although, South Africa’s membership of the African Union will continue to compel some support to the wider region, we may see South Africa reduce its troop contributions,” they added.