An ANC, EFF, and MK coalition poses a risk to South Africa’s macroeconomic stability linked to a broad weakening of investor confidence or eroded governance, says Fitch Ratings.
The ruling ANC only garnered 40% support in the 2024 national elections, with a 58% turnout, forcing the party into discussions with other parties to share power.
The party needs support from either the Democratic Alliance (DA), the uMkhonto weSizwe (MKP) or the Economic Freedom Fighters (EFF) in order to rule.
Fitch Ratings indicated that different government formations could lead to varied policy outcomes, significantly impacting South Africa's credit rating.
In January 2024, Fitch reaffirmed South Africa's rating at 'BB-', with a Stable Outlook, while cautioning that the country’s debt remains a significant issue.
A substantial rise in the government debt-to-GDP ratio or a further decline in long-term economic growth could prompt a negative rating adjustment.
This is because sluggish economic growth hinders fiscal consolidation and exacerbates socio-economic challenges.
Fitch expressed concern that diminished public support in the election might drive the ANC to pursue short-term policies to secure a coalition or regain voter confidence.
“There is a risk that the weakened public support seen in the election could incentivise the ANC to adopt short-termism policies to secure a coalition or win back public support,” Fitch said.
“Fiscal consolidation could suffer as a result, but we think the fiscal impact will depend on the arrangements the ANC makes to govern.”
Prior to the election, Fitch anticipated that the ANC could govern with the help of a few smaller parties, ensuring broad policy continuity.
However, the ANC’s vote share was lower than expected, necessitating support from either the DA, MK, or EFF to form a government.
"We believe an arrangement where the DA supports the ANC from outside government would be more likely than a formal coalition between the two, owing to strong divergences between their voter bases on some key issues, such as the direction of foreign policy, as well as historical factors.
"If it was secured, we think support from the DA would probably enable president Cyril Ramaphosa to continue implementing his main priorities, including tackling infrastructure issues," said the ratings agency.
It would likely result in the least significant changes to key credit metrics, such as South Africa’s debt trajectory, over the medium term, although fiscal tightening might be enhanced.
"We think the DA would likely try to lengthen the phase-in period of the National Health Insurance bill that was signed by President Ramaphosa shortly before the elections – a bill whose effects are not yet incorporated in Fitch’s forecasts," it said.
The MK and EFF are populist parties and campaigned on radical agendas, with many shared elements. These included wide-scale land expropriation without compensation, nationalisation of key parts of the economy - including mines, the central bank and large banks and insurers - halting fiscal consolidation and aggressively increasing social grants.
Fitch said that reaching agreement with the MK or EFF would require significant concessions by at least one of the parties involved, as the ANC’s stance differs sharply on these policies.
"We believe an agenda advanced by a government backed by the MK or EFF would be less radical than their campaign platforms might suggest. Moreover, a number of policies proposed by the two parties would require constitutional changes that would be unlikely to pass parliament, in our view, given the outcome of the election."
Fitch said that even if the most radical policies do not come to pass, South Africa’s debt trajectory would face additional risks if the ANC enters into arrangements that rely on support from the MK or EFF.
"This outcome could also pose additional challenges to macroeconomic stability, for example if it led to a broad weakening of investor confidence or eroded governance."
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