How the 2024 elections could shift rand, markets
SA’s credit rating on the line
Analysts say a coalition between the ANC and EFF would likely lead to more populist, left-wing policies such as increased state spending on social grants, something that could imperil the country's credit rating.
Garth Theunissen - With the ANC facing the prospect of its electoral support falling below 50% for the first time in the upcoming general election, investment experts are preparing for the likely market impact of different coalition government possibilities.
The most financially risky of those outcomes is a possible coalition between the ANC and EFF, which analysts say will result in economic policy taking a more populist left-wing stance. This could lead to increased government spending on social grants or the mooted National Health Insurance plan (NHI).
With South Africa’s gross public debt already expected to exceed 80% of gross domestic product (GDP) in the next fiscal year as subpar economic growth constrains state tax revenues, the possibility of an ANC-EFF partnership may even imperil SA’s sovereign credit rating if it results in fiscal slippage.
Economic policy
Peter Kent, a fixed-income portfolio manager at Ninety One, expects that an ANC-EFF coalition would push economic policy "quite radically" to the left. The EFF proposes aggressive land expropriation and the nationalisation of private-sector companies.
Mpho Molopyane, executive chief economist at Alexforbes, expects that an EFF coalition could increase social spending – "which by itself is not necessarily negative, particularly if the fiscal stance is preserved."
"But in an environment where we do see fiscal expansion, where National Treasury does increase the fiscal purse, that could be negative for credit ratings for the country. The market would regard that quite negatively."
Earlier this month, Fitch Ratings said that even if the ANC loses its majority in the general election, it does not expect this will result in major changes in economic policy.
However, it is concerned about the country's ballooning debt as weak tax collections are forcing the state to borrow. South Africa’s current debt of 76% of GDP is way higher than the 52% level median level for BB-graded countries.
Markets
For the markets, the best-case scenario is a coalition between the centrist, business-friendly DA and the ANC.
"The expectation is [that] if we were to see a DA-ANC coalition, that would lead to market-friendly policies," says Molopyane.
But while Kent also says a coalition between the ANC, DA and other "centrist" parties would be "a fantastic outcome" - he feels it is improbable.
"I’ll believe it when I see it," said Kent. More likely is that the ANC will form a coalition with a small party to obtain its majority, he says.
"Our base case is that the ANC is going to drop just below 50% [support]," said Kent. "They’ll probably coalesce with some of the smaller parties and as a result we’ll just have more of the same [economic policy]."
Ignore the noise
Uncertainty over the elections – and whether the ANC will enter into a coalition with the EFF – will keep pressure on local markets.
"The advice we always give in election years is to try and distil the signal from the noise. Some of the big signals are going to be seen in the budget, so let’s look at that rather than get caught up in the noise," said Kent.
One such signal to look out for in the budget speech, which is scheduled for 21 February, could be a reprioritisation of expenditure towards more social spending, to curry favour with the electorate.
However, beleaguered taxpayers can take some comfort from the historical evidence, which shows that South Africa does not appear to have a history of major fiscal slippage during election years.
An analysis by Rand Merchant Bank chief economist Isaah Mhlanga shows that the fiscal deficit actually improved in five of the last nine general and local government elections (2000, 2004, 2006, 2011 and 2016); widened in two (2009 and 2019); and remained relatively unchanged in 2014.
Nevertheless, there is some suggestion by Mhlanga's analysis which suggests that concerns about potential fiscal slippage aren't entirely unjustified.
"In 2009, the fiscal deficit widened due to the response to the global financial crisis, which is justified. There is no similar justification for the widening in 2019, which might suggest that fiscal decisions had some influence from elections," said Mhlanga.
"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."
Monetary policy
In terms of the election’s influence on monetary policy, Mhlanga is adamant that the central bank won’t be swayed by politicking.
His analysis shows the South African Reserve Bank (SARB) cut rates in four of the past five general elections (1999, 2004, 2009 and 2019) with the biggest cuts coming in 1999 and 2009.
During general election years, the SARB cut policy rates only in 2019 by a quarter of a percentage point while it hiked rates in three of the past five local government election years (2000, 2006 and 2021). It cut rates by 25 basis points in 2016 and kept rates unchanged in 2011.
"Looking at both general and local government elections, the SARB has cut rates in seven of the past ten elections, which would suggest that the SARB has a bias towards cutting rates during election years. This interpretation would be incorrect if one looks at inflation dynamics, which, after all, is the core mandate of the SARB," said Mhlanga.
"While there seems to be rate cut bias, the SARB’s decisions have been driven by its core mandate of price stability.
“Except for the 2000 local government elections where inflation was rising and went above the 6% target during the election year, inflation has been either falling or well within the SARB’s 3%-6% target band. Inflation dynamics during election years justified monetary policy decisions and do not appear to have been influenced by elections."
Currency
As far as the rand is concerned, Mhlanga says the currency depreciated by an average of 1% during each of the last ten general and local government elections since 1999.
However, he says there seems to be a recovery in the rand after the elections, which suggests that currency markets tend to price in political risks ahead of an election and unwind it after elections.
"Historical experience suggests two-way risk, a rally or sell-off," said Mhlanga.
"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." – Fin24
The most financially risky of those outcomes is a possible coalition between the ANC and EFF, which analysts say will result in economic policy taking a more populist left-wing stance. This could lead to increased government spending on social grants or the mooted National Health Insurance plan (NHI).
With South Africa’s gross public debt already expected to exceed 80% of gross domestic product (GDP) in the next fiscal year as subpar economic growth constrains state tax revenues, the possibility of an ANC-EFF partnership may even imperil SA’s sovereign credit rating if it results in fiscal slippage.
Economic policy
Peter Kent, a fixed-income portfolio manager at Ninety One, expects that an ANC-EFF coalition would push economic policy "quite radically" to the left. The EFF proposes aggressive land expropriation and the nationalisation of private-sector companies.
Mpho Molopyane, executive chief economist at Alexforbes, expects that an EFF coalition could increase social spending – "which by itself is not necessarily negative, particularly if the fiscal stance is preserved."
"But in an environment where we do see fiscal expansion, where National Treasury does increase the fiscal purse, that could be negative for credit ratings for the country. The market would regard that quite negatively."
Earlier this month, Fitch Ratings said that even if the ANC loses its majority in the general election, it does not expect this will result in major changes in economic policy.
However, it is concerned about the country's ballooning debt as weak tax collections are forcing the state to borrow. South Africa’s current debt of 76% of GDP is way higher than the 52% level median level for BB-graded countries.
Markets
For the markets, the best-case scenario is a coalition between the centrist, business-friendly DA and the ANC.
"The expectation is [that] if we were to see a DA-ANC coalition, that would lead to market-friendly policies," says Molopyane.
But while Kent also says a coalition between the ANC, DA and other "centrist" parties would be "a fantastic outcome" - he feels it is improbable.
"I’ll believe it when I see it," said Kent. More likely is that the ANC will form a coalition with a small party to obtain its majority, he says.
"Our base case is that the ANC is going to drop just below 50% [support]," said Kent. "They’ll probably coalesce with some of the smaller parties and as a result we’ll just have more of the same [economic policy]."
Ignore the noise
Uncertainty over the elections – and whether the ANC will enter into a coalition with the EFF – will keep pressure on local markets.
"The advice we always give in election years is to try and distil the signal from the noise. Some of the big signals are going to be seen in the budget, so let’s look at that rather than get caught up in the noise," said Kent.
One such signal to look out for in the budget speech, which is scheduled for 21 February, could be a reprioritisation of expenditure towards more social spending, to curry favour with the electorate.
However, beleaguered taxpayers can take some comfort from the historical evidence, which shows that South Africa does not appear to have a history of major fiscal slippage during election years.
An analysis by Rand Merchant Bank chief economist Isaah Mhlanga shows that the fiscal deficit actually improved in five of the last nine general and local government elections (2000, 2004, 2006, 2011 and 2016); widened in two (2009 and 2019); and remained relatively unchanged in 2014.
Nevertheless, there is some suggestion by Mhlanga's analysis which suggests that concerns about potential fiscal slippage aren't entirely unjustified.
"In 2009, the fiscal deficit widened due to the response to the global financial crisis, which is justified. There is no similar justification for the widening in 2019, which might suggest that fiscal decisions had some influence from elections," said Mhlanga.
"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."
Monetary policy
In terms of the election’s influence on monetary policy, Mhlanga is adamant that the central bank won’t be swayed by politicking.
His analysis shows the South African Reserve Bank (SARB) cut rates in four of the past five general elections (1999, 2004, 2009 and 2019) with the biggest cuts coming in 1999 and 2009.
During general election years, the SARB cut policy rates only in 2019 by a quarter of a percentage point while it hiked rates in three of the past five local government election years (2000, 2006 and 2021). It cut rates by 25 basis points in 2016 and kept rates unchanged in 2011.
"Looking at both general and local government elections, the SARB has cut rates in seven of the past ten elections, which would suggest that the SARB has a bias towards cutting rates during election years. This interpretation would be incorrect if one looks at inflation dynamics, which, after all, is the core mandate of the SARB," said Mhlanga.
"While there seems to be rate cut bias, the SARB’s decisions have been driven by its core mandate of price stability.
“Except for the 2000 local government elections where inflation was rising and went above the 6% target during the election year, inflation has been either falling or well within the SARB’s 3%-6% target band. Inflation dynamics during election years justified monetary policy decisions and do not appear to have been influenced by elections."
Currency
As far as the rand is concerned, Mhlanga says the currency depreciated by an average of 1% during each of the last ten general and local government elections since 1999.
However, he says there seems to be a recovery in the rand after the elections, which suggests that currency markets tend to price in political risks ahead of an election and unwind it after elections.
"Historical experience suggests two-way risk, a rally or sell-off," said Mhlanga.
"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." – Fin24
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