What will the election mean for investors?

South Africans will vote in the national election on May 29 and, for the first time since the end of apartheid 30 years ago, polls suggest the governing 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 SA'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 EFF or the economically liberal 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 US-asset manager William Blair Investment Management.

“The greyer zone of between 45%-50%, whereby [the 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 “knee jerk” sell-off of SA assets, said Mpho Molopyane, chief economist at SA investment and insurance company Alexforbes.

“The concern is that … we could see the government turning more populist, increasing social spending, implementing policies that are anti-business, the reform agenda slowing down,” she said.

Meanwhile, coalition discussions between the ANC and DA would likely lead to a “risk-on rally”, where prices rise, Molopyane said.

“A coalition with the DA is regarded as likely to be more business friendly... an efficiently run state, fiscal prudence — all of which would bode well for SA’s growth prospects,” she said.

How might the election affect the rand?

The rand has reflected SA’s economic woes in recent years. The currency has weakened a touch year-to-date and marked annual losses of 5% or more in the previous four years.

“Fair value” for the rand-dollar exchange rate is about R18.10/$, so with it currently trading just below R18.40 there is a relatively small election-linked risk premium, said Elna Moolman, Standard Bank’s head of SA macroeconomic, fixed income and currency research.

“This is … consistent with the general sense that investors now generally expect a benign election outcome (which ensures policy continuity),” she said.

Citi's Luis Costa noted that the election risk premium had already faded in recent days and weeks.

“The more fundamental factors in [the rand] have been recently supportive of economic activity such as the terms of trade dynamics and the improved domestic load-shedding (which, however, may not last after the polls close),” Costa said in a note to clients.

How will the election affect the economy and investment?

The country’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, SA 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 $9.19bn in 2022 compared to some $374m 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 SA include infrastructure challenges, skilled worker shortages, the 'greylisting' of SA 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, SA'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.

Reuters