Real returns in a rocky year

To a year already packed with political intrigue, drama and a record number of elections, we can now add the sudden unexpected collapse over the weekend of the Bashar al-Assad dictatorship in Syria after years of violent stalemate. No one knows what lies ahead for Syria, ruled with an iron fist by the Assad family for five decades.

Since the 2011 ‘Arab Spring’, civil war has raged in Syria and Assad’s regime was propped up by support from Russia and Iran. However, these two countries have been distracted by other conflicts, and rebels seized the opportunity. These events bring more uncertainty and potential instability to the world’s great geopolitical fault line, the Middle East. So far, the oil price, the main financial barometer of Middle Eastern tensions, remains muted.

Days earlier, we saw unbelievable scenes from South Korea, where the president tried and failed to impose martial law. It is not a large country and has a minimal impact on global markets apart from Samsung and a few large multinational firms, but South Korea has been a beacon of stability sitting atop another geopolitical fault line. With its nuclear-armed neighbour now involved in the Ukraine war, the last thing the world needs is chaos in the south. However, the country’s institutions have held up well, and it seems President Yoon Suk Yeol will be on his way out eventually.

Elsewhere, a budget stand-off in the French parliament led to Prime Minister Michel Barnier losing a no-confidence vote, the first time since 1962. This comes just a few weeks after the ruling coalition in Germany fell apart, also because of budget disagreements, leading to elections scheduled for early next year.

More debt, less debt
The difference between France and Germany is that the former has too much debt and the latter too little. France’s government debt-to-gross domestic product (GDP) ratio is 110%, while it is 62% in Germany, one of the few countries where the ratio has declined over the past decade. To address this, Barnier tried to narrow the French fiscal deficit through tax increases and spending cuts, while in Germany there were plans to increase borrowing to fund necessary investments in infrastructure, green energy and military capacity, that face opposition. A limit on borrowing, the so-called debt brake, is enshrined in the constitution, a sign of how seriously fiscal matters are taken in Germany. Nonetheless, releasing this debt brake to invest in the future is crucial for Germany’s longer-term economic health.

Chart 1: French and German 10-year government bond yields

Source: LSEG Datastream

The spread between French and German bond yields has therefore widened, uncomfortably echoing the Eurozone fiscal crisis of 2010-12. This comes at a time when the Eurozone economy, particularly Germany, is already under pressure and European leaders await Donald Trump’s second term with some trepidation. However, we are nowhere close to a fiscal crisis since French bond yields remain low in absolute terms around 3% and the French government can still easily fund itself. The risk of a chaotic breakup of the single currency, the fear underlying the crisis of a decade ago, has also diminished substantially since even the populist parties that have been as ascendent across the continent in recent years have no plans to abandon the euro.

GNU in context
All of this puts South Africa’s big political year in context. Though the May election result was unexpected, with the ruling ANC doing worse than expected, the formation of a centrist coalition, styled as a government of national unity (GNU), was also a surprise, a positive one from the market’s point of view. It is also worth highlighting again how important it was for the long-term credibility of South African democracy that the ANC immediately accepted the loss of its majority after 30 years in power. Violence is still simmering across the border in Mozambique where the opposition claims the election outcome was rigged. Things also didn’t go smoothly in Namibia’s recent election, but it has been peaceful, and the glass ceiling has been broken as Netumbo Nandi-Ndaitwah will become the first female president in Southern Africa.

The GNU was founded on a set of agreed core principles that include fiscal discipline, growth-enhancing economic reforms, and an adherence to the rule of law. There are obvious areas of disagreement between the ANC and DA, the largest coalition partners, including contentious health and education acts (NHI and BELA). But there is also a strong incentive for all parties to make it work, at least for now. Whether it lasts the full five years remains to be seen, especially since the local government elections in 2026 could alter the political landscape, followed by internal ANC elections in 2027. However, a lot can be done in two years to cement crucial and long-lasting economic reforms. The progress in stabilising Eskom’s operational performance and restructuring the electricity market has already had a major impact. There has not been nationwide loadshedding since March.

The next key area of reform should be logistics, and 2025 must be the year where there are not only ongoing operational improvements at Transnet, but tangible evidence of private sector participation in rail and ports. Deals need to be signed, concessions issued, and wheels must hit the steel. This will be crucial for the economy’s performance and for investor confidence.

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