South Africa doesn’t have to reinvent the wheel

South Africa is entering a new era of coalition politics, but the new government will not have to change much as the country is already on the right trajectory.

Following the 2024 election, the ANC lost its majority in parliament for the first time in the democratic era.

The party thus announced a Government of National Unity (GNU), with ten political parties joining, including the DA and IFP.

Although the GNU did not shift into a populist or leftist direction, the survival of the centrist “coalition” is still in question.

“Coalition politics at the national level is new to South Africa, and there have been teething problems, including testy negotiations over Cabinet positions, which were finally settled over the weekend,” said Old Mutual Wealth Investment Strategist Izak Odendaal.

“And while the GNU includes parties that have long opposed one another and disagree deeply over some issues, it is based on a set of core principles that all parties recognise.”

“Importantly, these include respect for the Constitution (which includes property rights), the need for faster economic growth and social uplift, evidence-based (as opposed to ideological) policymaking, and abolishment of an impartial and professional civil service.”

However, Odendall said there won’t be the need to reinvest the wheel too much, as many essential reforms were already underway before the election and simply need to be cemented.

Operation Vulindlela, the joint initiative between the Treasury and the Presidency set up in 2020, is also focusing on tackling a number of issues that impede economic growth. It has already made progress in deregulating the electricity sector.

Moreover, fiscal consolidation has been underway and will likely continue, even if the GNU causes some shifts.

The retention of Enoch Godongwana as finance minister is a strong start.

The government also posted a small primary budget surplus in the 2023/24 fiscal year, meaning that tax revenue exceeded non-interest spending for the first time in 15 years. This is a key step towards changing the trajectory of public debt, which stood at R5.2 trillion (75% of GDP) at the end of the first quarter.

“In other words, while politics could be messy and uncertain, economic policy is still likely to move in the right direction, if gradually and unevenly so, raising the economy’s medium-term growth profile,” said Odendall.

“In turn, this should support South African asset classes even if political events cause volatility, as has been the case over the past month.”

Interest rate relief

In addition, customers could soon receive a boost from lower short-term interest rates.

Inflation is set to return to the South African Reserve Bank’s midpoint target of 4.5% by early next year.

“As in the rest of the world, local interest rates are not likely to fall much, but the more the government can deliver on reforms, the more room there will be for positive surprises,” said Odendaal.

“In most situations, stronger economic growth means higher rates, but in South Africa’s case, persistently disappointing growth puts upward pressure on rates by raising the risk premium.”

“The more the risk premium declines, the more rates can fall.”

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