Elections a chance to reaffirm the strength of our institutions

Izak Odendaal, Investment Analyst at Old Mutual Wealth.

On 3 August, South Africans go to the polls for the local government election. As a reminder, South Africans vote separately for national and provincial government in one election, and for local government in another.

Voter turnout typically lower for municipal elections

There are three types of municipal councils in South Africa (with the number of each in brackets):

• Metropolitan Councils (8)
• Local Councils (207)
• District Councils (44)

For metropolitan municipalities, voters get two votes, one for the ward councillor, and one for proportional representation. In other words, one vote is cast for a specific individual to represent the ward, and one vote for a political party who will nominate a representative for the council. This is unlike national and provincial government, which is based entirely on proportional representation.
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In other local municipalities, voters cast three votes: one for the local council ward, one for local council proportional representation; and one for district council proportional representation.

The first municipal elections run by the Independent Electoral Commission took place in 2000, and subsequently in 2006 and 2011.

Although the number of eligible voters increases over time with population growth, the proportion of South Africans who register to vote and show up on election day has declined. This could partly reflect disillusionment with the political process – i.e. with unmet promises – but this is also more or less the experience with other countries as their democracies have matured. Turnout – the number of registered voters who cast a vote – was 72% in the 2014 national election, down from 77% in 2009.

Voter turnout has tended to be lower during municipal elections, with 13.3 million voters turning out for the 2011 elections compared to 18.4 million for the 2014 national and provincial elections. A total of 26.3 million South Africans are registered to vote.

The election takes place against the backdrop of weak economic growth, and rising inflation, while already high unemployment has increased. The SA Reserve Bank recently said that there would be no economic growth in real terms this year, with expected growth of 1.1% next year and 1.5% the year after. Since population growth is around 1.6%, it means real income per head is experiencing a sustained decline for the first time since 2008.

Anti-establishment politics on the rise in developed countries

The global political backdrop is also interesting. Across the developed world, stagnant real incomes have frustrated many middle class voters, causing them to turn away from the established political parties and conventional candidates. In Italy, the opposition party is headed up by a comedian. Far-right parties are gaining ground in France and Austria. In the US, property tycoon and reality TV star Donald Trump secured the presidential nomination of the Republican Party. And voters in the United Kingdom unexpectedly chose to leave the European Union after four decades, putting the pound in a tailspin and causing massive economic uncertainty. It is clear that many “Brexit” voters were simply casting a protest vote, and did not fully comprehend the implications of leaving the EU.

Mixed progress in strengthening democracy in emerging markets

Among our emerging market peer group, there have also been interesting developments. When Nahendra Modi won an unexpected landslide victory in the Indian election in 2014, the market rallied strongly on the expectation that he would light a fire under the Indian economy after years of lacklustre rule by the Congress Party. Whether he has delivered the necessary reforms is still up for debate. Reformist president Mauricio Macri’s recent election victory means Argentina is re-engaging global capital markets again after 15 years of Kirchner rule.

In contrast, Russia under Putin has become less free and more authoritarian, and more of a meddler in international affairs. Its economy is in recession for the second year following the collapse of the oil price and the imposition of international sanctions.

Fellow BRICS (Brazil, Russia, India, China, South Africa) member Brazil is suffering the worst recession in decades, partly as a result of political problems. Runaway government spending under Former President Dilma Rousseff contributed to a collapse in the currency and spikes in interest rates, but this could not be contained because of political deadlock worsened by an epic corruption scandal involving many politicians, well-known businessmen and the country’s largest company, Petrobras. The country is slowly improving under a caretaker president while Rousseff’s impeachment proceedings are underway.

Of course the fifth BRICS member, China, is a one-party state that does not even pretend to be a democracy. At least its economy appears to be holding up well, allaying the hard-landing fears of late 2015.

A few weeks ago Turkey suffered an attempted coup. Turkey has a history of military coups, and the defeat of the takeover is a victory for democracy of sorts. Pity that President Erdogan, while democratically elected, has a strong authoritarian streak, something that was on display in the mass arrests and declaration of a state of emergency. Either way, Turkey is a divided country in a troubled part of the world (it shares a border with Syria), and these events just add further complexity to an already complicated country. Thailand is currently under military rule, after the 12th coup in 80 years.

In Malaysia, US$681 million (almost R10 billion or 40 Nkandla upgrades) from the sovereign wealth fund found its way into Prime Minister Najib Razak’s personal bank account. He was cleared of wrong-doing by his own government, but US authorities are now investigating money laundering.

This puts South Africa’s own political uncertainties into perspective. Indeed, if one considers our peer group as seen by international investors, we probably stand out as one of the more stable countries.

South Africa’s institutions a key strength

The International Monetary Fund’s deputy Managing Director, David Lipton said in a recent speech in Johannesburg that South Africa “should be proud of its world class public institutions”, including the judiciary, the Public Protector, the Auditor General, that were “the envy of many emerging market and developing countries”. This is South Africa’s strength, along with our strong macroeconomic policies, sophisticated financial system, innovative corporate sector and our position as a global economic gateway to the massive African continent.

Our biggest structural weaknesses, Lipton highlighted, is what economists call the ‘insider-outsider’ problem: big business and unions squeezing out small businesses and the unemployed. In key sectors state owned enterprises have monopolies, though some are quite efficient and badly managed. The formal economy maintains high barriers of entry, particularly for unskilled workers and township entrepreneurs. Corruption, he said, only serves to reinforce the “dynamics of exclusion”, as the National Development Plan highlights.

While corruption is clearly a concern, the strength of our political, economic and legal institutions was also recently highlighted by ratings agencies Fitch, Moody’s and S&P Global when they left South Africa’s investment grade credit rating unchanged. Regular free and fair elections are a cornerstone of a functioning democracy and South Africa now has a solid track record in this regard. A well organised election is expected, and in municipalities where opposition parties win, the transition is likely to be peaceful, though it might be protracted if no party wins an outright majority and coalitions need to be formed. Coalition governments, relatively unknown in South Africa but a feature of politics in Europe, are likely to become more common locally in the future. Coalitions are by nature more unstable, but they also tend to be more inclusive than single-party rule. Either way it is likely to be an interesting stage in South Africa’s political evolution.

Election unlikely to move markets

Markets tend not to react to South Africa’s elections, since the ANC has such a wide majority, most policy issues are addressed within the party and at party congresses, rather than at election time. For instance, the rand reacted more to the outcome of the ruling party’s 2007 Polokwane congress than it did to the 2009 general election (but in both instances global factors dominated).

While the upcoming local government elections promise to be the most hotly contested poll yet in democratic South Africa, the outcomes of local elections do not directly influence the policy decisions that investors generally care about. However, these elections are an opportunity to showcase our democratic credentials and institutional strength to the rest of the world at a time when many of our peers are struggling in this regard.