Impact of May 2024 elections on business and investor confidence in South Africa’s infrastructure drive

Policy certainty is a cornerstone for fostering business and investor confidence and crucial for driving economic growth and development in any country – a need that is particularly acute in South Africa, given the country's significant infrastructure gap.

With ageing and inadequate infrastructure hindering economic progress and social development, robust investment in infrastructure is essential. Importantly, it enhances connectivity and facilitates trade; it supports industrial expansion, enhances service delivery, and boosts overall economic productivity.

However, achieving these investments requires a stable and predictable policy environment, as uncertainty in policy can deter investors, delay projects, and exacerbate the infrastructure deficit. This, in turn, will impede the nation's development trajectory.

Ensuring policy stability is, therefore, imperative for attracting the long-term investments needed to close South Africa's infrastructure gap and support its broader economic aspirations.

Thus, the May 2024 election in South Africa has significant implications for business and investor confidence, particularly concerning the nation's ambitious infrastructure drive. The prospect of coalition governments introduces a mix of opportunities and challenges that could either bolster or undermine the much-needed investments in infrastructure.

One only has to consider the international experience of coalition governments. Evidence strongly suggests that policy discontinuity, compromise and conflict, legislative gridlock, and potential for political instability adversely affect infrastructure investments, given their impact on policy certainty. Policy certainty (or the lack thereof) affects investor confidence, ultimately impacting infrastructure investments.

Key concerns and implications related to coalition governments are:

Policy Discontinuity:
Coalition governments often lead to frequent policy changes as different parties seek to assert their influence. The key risk here is that it may create a volatile policy environment that deters long-term investments. Examples of this include the introduction of rollback policies in India (2014 onwards) and changes to economic and regulatory regimes in Argentina (2007 onwards). Both are cited in academic literature as deterrents to long-term investment and/or resulting in volatile gross fixed capital formation.

Importantly, stability and predictability are paramount for businesses and investors. Frequent policy shifts can disrupt planning and operations, making South Africa a less attractive destination for foreign investment.

Compromise and Conflict:
International evidence suggests that the necessity for compromise in a coalition government dilutes the effectiveness of policies. Looking at examples from Italy (2018/2019) and Belgium (2010 onwards), there were issues in implementing cohesive policies given the need to compromise, which resulted in reforms that did not aid in economic growth and, in fact, reduced investor confidence. As was the case in Belgium, cited as the longest period in which a country in Europe did not have an official government (541 days), the country experienced prolonged uncertainty, negative market reactions due to concerns about the country’s fiscal stability and governance (as an example bond yields sold off during the period), stalled economic reforms, and importantly, delayed planned investment in transport, energy and public utilities.

In the South African context, there is a real risk that coalitions may result in critical issues not being addressed comprehensively due to the necessary concessions among coalition partners with differing ideological stances. Any dilution in addressing critical issues is particularly problematic for tackling South Africa's deep-rooted structural economic problems and socio-economic disparities. A ‘watered-down’ policy approach could fail to deliver the substantial reforms needed to support the infrastructure drive.

Legislative Gridlock:
Divergent ideological perspectives within a coalition can lead to legislative gridlock, impeding significant reforms. Examples here abound, with a very recent one being in the US during President Obama’s second term (2013 onwards). With a ‘divided’ Congress, the impact created uncertainty for investors and negatively impacted gross fixed capital formation and infrastructure investments.

Legislative bottlenecks significantly hinder project approval and execution, frustrating investors who seek decisive action to improve infrastructure. These delays and inefficiencies impede the implementation of critical initiatives, undermining investor confidence and economic progress.

This concept is highly relevant in South Africa, especially in light of the political dynamics that could emerge following the May 2024 elections. The risk here is in coalition dynamics and, as mentioned above, party ideologies. If these result in legislative standstills and/or in policy inconsistency, it would be detrimental to or undermine the government’s ability to manage public services and implement the required agenda. Importantly, we highlight key bills that could be at risk should there be legislative gridlock:

National Infrastructure Plan Bill
Public Procurement Bill
Public Finance Management Amendment Bill
Expropriation Bill
Energy Regulation Amendment Bill
Water and Sanitation Bill
Transport Infrastructure Development Bill

Once again, businesses and investors prefer a consistent policy environment where they can make long-term plans without the risk of sudden policy reversals. Gridlocks or changes will thus be negative for us as a country.

Potential for Political Instability:
One only has to look again at Brazil (impeachment in 2016 and then corruption scandals in 2016/2018) or Thailand (military coup in 2014) to see how political instability fostered an uncertain investment climate.

In summary, political instability could ensue if local coalition partners cannot maintain a united front. Frequent motions of no confidence and leadership changes will create a climate of uncertainty, and political instability exacerbates policy uncertainty. Importantly, this will make it challenging to maintain investor confidence.

The Path Forward
From an investor's perspective, it is our view at PIM that South African political leaders must strive for stability and coherent policymaking to mitigate the potential negative impacts of a coalition government on policy certainty and investor confidence.

We have long believed that establishing clear, long-term strategies and maintaining open communication with the business community and investors will help alleviate concerns about policy discontinuity and political instability in our country.

Furthermore, adopting a pragmatic approach to governance that focuses on common goals and practical solutions rather than ideological rigidity can foster a more conducive environment for investment. This means prioritising economic reforms and infrastructure development as key agendas and ensuring that coalition partners are aligned on these critical issues. Evidence abounds regarding the impact of policy uncertainty and the importance of stable governance on investor confidence and driving the infrastructure necessary for our country’s progress.

While the May 2024 elections and the potential for coalition governments present challenges, they also offer an opportunity to forge a path of collaborative and inclusive governance. By prioritising stability, coherence, and a shared commitment to infrastructure development, South Africa can strengthen business and investor confidence, thereby supporting its ambitious infrastructure drive and broader development goals.