Investors Cautiously Optimistic About South Africa's New Unity Government

Investors are hopeful that South Africa’s newly formed unity government can implement stable economic policies to revive growth, but they remain cautious about how the coalition’s primary partners will reconcile their significant ideological differences.

Following last month’s national elections, the African National Congress (ANC), which has governed since the end of apartheid in 1994, entered into a coalition with the pro-business Democratic Alliance (DA) and several smaller parties after failing to secure a parliamentary majority.

This unprecedented alliance between the ideologically opposed ANC and DA represents a significant political shift in South Africa, setting the stage for a government of national unity under President Cyril Ramaphosa. This coalition aims to introduce reforms necessary to stimulate economic growth and address high unemployment and inequality.

Investors and credit rating agencies anticipate that the unity government will adopt more liberal economic policies. However, overcoming the ideological differences between the ANC and DA may pose challenges.

For instance, while the ANC has increased welfare spending, the DA advocated during the election campaign for reducing some of these payments and eliminating certain ANC black empowerment policies.

The left-wing Economic Freedom Fighters and former President Jacob Zuma’s party, uMkhonto weSizwe, have opted out of the unity government, joining the opposition instead.

“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,” stated HSBC economist David Faulkner in a note.

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

The unity government plans to prioritize rapid, inclusive, and sustainable economic growth, promote fixed capital investment, create jobs, pursue land reform, and develop infrastructure, according to the ANC.

“The election outcome is broadly favourable for the economic and fiscal outlook, compared with the alternatives,” S&P Global Ratings noted. However, S&P also warned that the government faces significant challenges in reviving growth and maintaining fiscal discipline while navigating 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 destabilize the government,” S&P warned. The smaller parties in the unity government include the socially conservative Inkatha Freedom Party and the right-wing Patriotic Alliance.

Financial markets have responded positively to the unity government, with South Africa’s banking index, a measure of local economic recovery prospects, increasing by 19% since June 7, when the ANC announced its intention to form a unity government.

The rand, one of the few emerging market currencies to gain since the start of the year, and local government bonds have also shown positive reactions.

“The spread between our bonds and US bonds, it’s pretty much back to where it was pre-election,” said Mike van der Westhuizen, portfolio manager at Citadel, a local wealth management firm. “That risk premium in bonds is at sort of fair value,” he added.

Investors expect the unity government to accelerate the ANC’s existing reform plans for electricity, rail, and ports—critical areas needed to revive an economy that has seen minimal growth over the past decade and suffers from one of the highest unemployment rates in the world.

The DA supports the government program “Operation Vulindlela,” initiated in 2020 by the ANC-led administration to expedite structural reforms.

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

President Ramaphosa is expected to announce his new cabinet, in consultation with his coalition partners, a few days after his inauguration on Wednesday. Some analysts have expressed concern that the ANC might retain control over 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,” stated Tellimer market research in a note.

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