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29 April 2024 Old Mutual Wealth Investment Strategist, Izak Odendaal

In exactly a month, South Africa heads to the polls for a national general election. It is one of several notable elections worldwide.

The stakes are particularly high locally, as it is the first time since the dawn of democracy in 1994 that a coalition government at national level seems the most likely outcome. What kind of coalition we end up with is keeping both armchair and professional political analysts deeply occupied.

Global and local investors are particularly concerned over the possibility of an EFF-ANC coalition that could pull policy in a sharply leftist-populist direction. As one analyst put it, it is a “low probability, high anxiety outcome.” But there are many other possible coalition permutations. Much has been written about these various scenarios elsewhere, so no need to spend much time on them here, other than to say that in almost any plausible coalition the ANC remains the majority partner. It should therefore retain the key cabinet positions, and not give up the position of finance minister to an opposition party, for instance. Its policies will also dominate the coalition’s list of priorities, pointing to broad continuity.

And from investors’ point of view, it is policy that matters most, not politics. Politicians say a lot of things; it is what they do that matters, particularly when it comes to the economy. What we don’t want is an outcome that potentially sets back the gradual progress that has been made in addressing the economy’s biggest constraints.

There are many, of course, but the five issues that probably top the list of factors holding back growth and job creation are:
• Electricity. It is well near impossible to run a modern economy without a reliable energy supply. The impact of fifteen years of loadshedding, and really intense loadshedding over the last five years or so, is measured not only in the jobs lost but also in the jobs that could not be created.
• Transport. The logistics crisis is of a more recent vintage, but the underlying cause of a failing monopoly state-owned enterprise is the same. Particularly in the transport of bulk items like coal and iron ore, the poor state of rail and port facilities is costing the economy billions.
• High interest rates. This is not just due to the Reserve Bank’s policy stance, which will change as the inflation outlook improves. Market interest rates in South Africa are high because of fiscal risks. Failure to stabilise government debt levels are hurting the local economy today due to the resultant high borrowing costs and negative impact on confidence over the longer term.
• Service delivery failures at local government level. It is extremely difficult to grow businesses when basic services like water, sewage and roads are not delivered. For instance, how do tourists get to South Africa’s beautiful countryside if the roads are more pothole than tarmac? How do farmers get their goods to market? Meanwhile, unreliable water supplies in many towns and even big cities like Durban and Johannesburg are increasingly a headache for businesses.
• Organised crime. South African has internationally high levels of unemployment and inequality and crime has long been a consequence. All South Africans are impacted, but the poor are most exposed. Recent years, however, have seen the very worrying emergence of crime syndicates targeting bigger businesses, and causing large losses. These include extortion ‘mafias’ in construction and transport, cable theft and illegal mining.

Chart 1: Electricity and logistics constraints

Source: LSEG Datastream

Progress in these areas will go a long way to faster economic growth, which in turn can start to ease many of the social pressures. The good news is that there has been a lot of progress on the electricity side. There is great scepticism over whether the current streak of loadshedding-free days will continue after the election, but that misses the point. There has been massive private investment in electricity generation and more in the pipeline. It seems extremely unlikely that any incoming coalition arrangement will roll back these reforms.

The process of liberalising rail and port network is also underway but lags the electricity sector. This too is likely to continue after the election, since the government’s own finances have been badly hurt by lost tax revenue, particularly from depressed coal export volumes.

This brings us to fiscal policy, perhaps the biggest area of uncertainty after the election. Considering the elevated government bond yields in chart 2, investors are clearly concerned that a new governing coalition go on a spending spree, abandoning the attempts at fiscal discipline we’ve seen in recent years.

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