BMI, a division of Fitch Solutions, anticipates that the African National Congress (ANC) will likely form a coalition with smaller parties following the general elections on May 29.
BMI projects that the ruling ANC will lose its majority, securing around 45% of the vote, but will remain the main policy driver by partnering with smaller parties.
However, if the ANC's vote share falls to 40% or below, two alternative coalition scenarios are likely: an ANC-EFF coalition or an ANC-DA coalition.
The BMI explores the potential outcomes of these scenarios.
Scenario 1: ANC-EFF Coalition
An ANC coalition with the EFF would likely see a wider fiscal deficit, slower real GDP growth, a weaker rand, and closer ties to Russia and Mainland China throughout 2024 and 2025, said the BMI.
Scenario 2: ANC-DA Coalition
Conversely, an ANC-DA coalition could lead to a narrower fiscal deficit, stronger economic growth, improved currency performance, and better US-South Africa relations, provided they can align on policy.
Polling data from February and April 2024 shows the ANC polling below the 40% mark. Should the ANC’s vote share fall to 40% or lower, a coalition with a larger opposition party would be necessary to pass legislation, said the BMI.
However, ideological differences on issues like power sector reforms, land reform, labour regulations, and the National Health Insurance bill could hinder policymaking.
Economic Growth Implications
ANC-EFF Coalition:
Under an ANC-EFF coalition, the EFF's push to increase social transfers could modestly support household spending. However, high unemployment rates would continue to suppress private consumption growth.
A reduction in fixed investment as government capital expenditure is overshadowed by increased recurrent spending demands. Additionally, a decline in business confidence could dampen private investment, BMI said.
ANC-DA Coalition:
The DA’s pressure to implement pro-business reforms and streamline grants could support Finance Minister Enoch Godongwana’s efforts to consolidate social spending. This might lead to increased infrastructure investment. Initiatives to cut bureaucratic hurdles and establish 'one-stop-shops' for small businesses would likely boost fixed investment by easing business operations.
Currency Implications
ANC-EFF Coalition:
The immediate announcement of an ANC-EFF coalition would likely cause the rand to fall sharply against the dollar.
Investor deterrence, compounded by global geopolitical tensions and delays in the US Federal Reserve's easing cycle, would negatively impact emerging market currencies like the rand, said BMI.
The EFF's stance on increasing business regulation and union support would weaken South Africa's investment appeal, affecting portfolio and foreign direct investment, the report noted.
If the EFF influences key economic policies and leftist factions within the ANC push for more interventionist policies, the currency could weaken further.
However, if Cyril Ramaphosa remains as ANC head and state president, we expect the currency to recover most of these losses by the end of 2024.
ANC-DA Coalition:
An ANC-DA coalition might initially create uncertainty among investors due to potential policymaking slowdowns. However, if the collaboration proves effective, the rand could outperform current expectations.
DA-led reforms to streamline business regulation could attract more private investment. However, such reforms might spur social unrest, leading to increased volatility of the rand, BMI said.
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