GNU showdown puts South Africa on edge

South Africa’s rand weakened as politicians from the coalition government’s two biggest parties continued talks aimed at resolving a dispute over the national budget.

The split between the African National Congress and the Democratic Alliance over Finance Minister Enoch Godongwana’s spending plan has raised investor anxiety about a potential fracture in the ruling alliance.

They’re concerned that a collapse of the current administration risks opening the way for the ANC to seek support from leftist parties such as the populist Economic Freedom Fighters to continue governing.

In return for its support on the budget, the DA—the second-largest party after the ANC—has demanded a signed agreement that gives it a greater say over economic policy. 

Talks on Monday failed to secure an accord, “imperilling the government of national unity,” DA leader John Steenhuisen said in a post on X.

The rand traded 0.2% weaker at 18.36 per dollar by 10h28 in Johannesburg on Tuesday after recovering some of its earlier losses.

The yield on benchmark 2034 government bonds rose one basis point on Tuesday to 10.64%. The rate has climbed about 10 basis points since the budget was first delayed last month.

“The South African government bond curve has steepened, given more long-dated issuance as well as a likely premium for uncertainty due to the budget, tensions within the GNU and external risk factors,” said Samir Gadio, head of Africa strategy at Standard Chartered Bank.

“If the budget is passed and a compromise is reached between the ANC and DA, this premium could recede somewhat.”

Parliament’s finance committee began considering the fiscal framework — which establishes economic policy, revenue projections and limits on government spending — on Tuesday morning and is expected to vote on it later in the day.

The process allows political parties to propose amendments to the budget legislation, including removing a proposed increase in the value-added tax rate—a key sticking point between the DA and the ANC.

The DA’s spokesman for finance, Mark Burke, said he’d been mandated by his party to propose an amendment to the fiscal framework to exclude the proposed VAT hike.

Despite differences, the DA said it was optimistic that a deal is still possible. 

“The conversation between the ANC and the DA is constructive and ongoing,” Burke said in an earlier interview with Johannesburg-based broadcaster Newzroom Afrika. 

ANC chief whip Mdumiseni Ntuli sounded a more combative tone, saying that while there is broad consensus about the budget in its current form, that does not include the DA.

“We are convinced that, other than the DA, parliament is going to stand united to pass the budget,” he told broadcaster ENCA. “What then happens to the DA, I don’t know.”

Still, DA spokesman Willie Aucamp said Steenhuisen and President Cyril Ramaphosa — the head of the ANC — held a brief phone conversation earlier on Tuesday morning.

Ramaphosa has called an urgent meeting with Steenhuisen, Johannesburg-based news website TimesLive reported.