What are the key issues for investors in South Africa's 2024 election?

South Africans vote in a national election on May 29 and, for the first time since the end of apartheid 30 years ago, polls suggest the ruling African National Congress party (ANC) is at risk of losing its parliamentary majority. Investors are paying close attention.

WHY IS A MAJORITY IMPORTANT?

If the ANC gets less than 50% support it would have to seek one or more coalition partners to govern Africa's most industrialised economy. The new parliament will choose South Africa's next president.

The new government will set fiscal and economic policy for the coming five years, and investors want to see if the next administration is likely to tack sharply left, head in a more business-friendly direction or prevail with the status quo of slow reforms.

WHAT ARE INVESTORS FOCUSED ON?

An April Ipsos poll put the ANC's support at 40.2% and most surveys have estimated it will get below 45%, the level financial analysts say it needs to reach to enlist smaller, centrist coalition partners.

Otherwise, the ANC may have to seek a deal with the far-left Marxist Economic Freedom Fighters (EFF) or the economically liberal Democratic Alliance (DA).

"The market is watching very closely to see the degree to which the ANC... (is) forced to engage in coalitions with what are perceived to be extremely left-wing parties such as the MK (uMkhonto we Sizwe party) and EFF," said Yvette Babb, a portfolio manager at U.S.-asset manager William Blair Investment Management.

"The greyer zone of between 45%-50%, whereby they (ANC) may need to form a coalition with smaller parties that are more centrist, is not deemed to be a bad thing...perhaps that introduces more checks and balances into the governance process."

HOW WILL MARKETS REACT?

Post-election coalition discussions between the ANC and the EFF or the recently-formed MK, led by former President Jacob Zuma, would lead to a "kneejerk" sell-off of South African assets, said Mpho Molopyane, chief economist at South African investment and insurance company Alexforbes.

HOW WILL THE ELECTION AFFECT THE ECONOMY AND INVESTMENT?

South Africa's economy has barely grown in the last decade, crippled by the record power cuts and the degraded transport network. The economy grew just 0.6% in 2023.

"I don't see any political party with a real plan to stimulate the economy, only promises for everyone to somehow have a job," said independent risk consultant Marisa Lourenco, adding foreign direct investors were in wait-and-see mode.

"But as the dust settles after the election, South Africa will still remain attractive for certain industries, like gas, renewables, mining (like manganese)."

Net FDI inflows have generally been higher than pre-1994, when the ANC took power, World Bank data shows. Inflows stood at $9.19 billion in 2022 compared to some $374 million in 1994.

In contrast, foreign investors have cut holdings of stocks and bonds. Foreign ownership of domestic government bonds fell from a peak of 42.8% in 2018 to under 25% this year.

Other issues for international businesses operating in South Africa include infrastructure challenges, skilled worker shortages, the 'greylisting' of South Africa financial sector over transparency concerns and delays for foreign workers getting permits, said Simone Pohl, CEO of the Southern African-German Chamber of Commerce and Industry.

"Despite those challenges, South Africa's highly diversified economy, overall market volume, free press and its independent justice system still make it the number one investment location in Southern Africa," she added.