Analysts optimistic GNU can deliver reforms for growth

Investors are optimistic SA’s new unity government can deliver stable economic policies to revive growth, but are cautious about how the new coalition’s main partners can reconcile stark ideological differences.

The ANC has struck a deal with the DA and smaller parties after failing to win a parliamentary majority in May’s national elections. The agreement marks a major political shift and paves the way for a government of national unity (GNU) under President Cyril Ramaphosa to bring in the reforms needed to create economic growth and tackle high levels of unemployment and inequality.

Investors and credit ratings agencies see the two biggest parties in the unity government agreeing on more liberal economic policies, but they could struggle to overcome their ideological differences.

The ANC has increased spending on welfare payments, but the DA had in the run-up to the election pushed to roll back some of them and to scrap some BEE policies.

Referring to the EFF and the party of former president Jacob Zuma, uMkhonto weSizwe (MK), HSBC economist David Faulkner said in a note: “With populist parties choosing to reject the GNU, and the ANC’s bigger partners in the governing coalition centre-leaning and favouring more liberal economic policies, we think the GNU opens the possibility for more growth-friendly structural reforms and prudent macroeconomic policy choices. 

“But the GNU could also face ideological divisions and worsen fractures within the ANC, factors that could make establishing a stable policy framework difficult.”

Among its priorities, the unity government is set to focus on rapid, inclusive and sustainable economic growth, the promotion of fixed capital investment, job creation, land reform and infrastructure development, the ANC has said.

Broadly favourable

“The election outcome is broadly favourable for the economic and fiscal outlook, compared with the alternatives,” S&P Global Ratings said on Tuesday, but it also said the government faced an uphill battle to revive growth and maintain fiscal discipline  while navigating the new realities of coalition politics.

“Despite the reasonably constructive outcome, significant ideological differences between the ANC and the DA on issues such as affirmative action and foreign policy could destabilise the government,” S&P said.

Investors anticipate that the unity government will pick up the pace on the ANC’s existing reform plans for electricity, rail and port sectors.

The DA has endorsed Operation Vulindlela, which was initiated in 2020 to speed up structural reforms.

Adam Furlan, the emerging markets fixed-income portfolio manager at Ninety One, said the DA’s desire to support the initiative boded well for policy continuity. “We expect that to continue and hopefully at a more brisk pace,” said Furlan.

Ramaphosa is expected to announce his new cabinet, in consultation with his new coalition partners, a few days after his inauguration on Wednesday.

Some analysts expressed concern that the ANC was unlikely to give up the key finance portfolio.

“The best-case scenario for asset prices from this point is that the DA gets responsibility for finance, public enterprises and energy, and the worst-case, is that their cabinet representation is merely a token one,” analytics firm Tellimer said in a note.

Reuters