By Dennis Shen and Elena Klare, Sovereign and Public Sector

The African National Congress’s loss of a parliamentary majority for the first time since the end of Apartheid 30 years ago signals growing voter frustration about the country’s economic and social direction. Regardless of the final government that is formed, decision making and governance in South Africa (rated BB) is likely to prove more complicated over the next five years, and potentially beyond.

The ANC won 40.2% of the vote, down from the 57.5% in 2019 elections. The main opposition and head of a Multi-Party Charter against the ANC, the Democratic Alliance (DA), received 21.8%, with ex-President Jacob Zuma’s uMkhonto we Sizwe (MK) estimated at 14.6% and the far-left Economic Freedom Fighters (EFF) at 9.5%. The ANC has under two weeks to form a government before the next parliament convenes to elect the president, although the law provides for an extension if no candidate can be agreed.

Based on the election result, the ANC does not have enough votes to be able to rely on smaller groups alone to form a government. It needs the support of at least one of the three main opposition groups – the DA, MK or the EFF – either by way of a formal coalition or outside confidence-and-supply support for a minority ANC government. The three main opposition parties have diverging policy preferences, ranging from a business-friendly DA to the nationalisation and expropriation programme of the EFF to the populist MK. If coalition talks are unsuccessful, repeat elections also cannot be ruled out.

The ANC might share more policy commonalities with MK or EFF, both groups having split earlier from ANC, but the ANC leadership may have the least appetite for government with either. MK has stated co-operation is only on condition of President Cyril Ramaphosa resigning as ANC head. The DA has expressed an intent to consider co-operation with the ANC – including within formal coalition – if this means blocking EFF or MK entering government. But it is far apart from the ANC on policy, and any link-up with the DA may alienate a share of ANC voters.

A less-coherent government in coming years

South Africa is thus set for a phase of heightened political uncertainty. While the precise policy architecture is unclear between any shift to the left with either the EFF and/or MK or a more investor-friendly move to the middle-ground under partnership with the DA, a less-coherent and ultimately less stable South African government is likely to emerge for the period ahead given inevitable disagreements between the parties forming or supporting the government. There is no tradition of government by coalition at the national level; the ANC-EFF alliance within a number of city councils following 2021 local elections has seen conflict. Furthermore, the court challenge of MK against the legitimacy of the elections speaks to increasing governance hurdles.

This is even if the ANC lacking an outright majority institutes some crucial checks and balances missing over the past years and enhances accountability.

Most importantly, the government that is formed will determine the outlook for the resolution of historic challenges, including crime and corruption, unemployment of nearly a third of the active labour force, record power shortages and bottlenecks in the transport network. Any government with DA involvement may see a greater willingness for market-friendly reform and acceleration of privatisations but limitations on capacity to execute such growth-enhancing reform because of policy gridlock.

We are forecasting real growth of only 0.9% this year and 1.1% for 2025, below the economy’s medium-run trend rate of 1.5%.

Challenging budgetary outlook could add pressure on sovereign credit rating

Entering the elections, Scope had predicted continuous budgetary deficits and government debt to GDP increasing to nearly 90% by end-2029. This forecast has contrasted sharply with government projections that debt will peak by fiscal year 2025-26 at 75.3% of GDP and decline after that.

In addition, we currently forecast that net interest payments will rise from 18.4% of revenues last year to 25% by 2029. Debt and interest forecasts are high by emerging-market standards. Any adverse shock to Scope’s assumptions may call into question the sustainability of debt, risking a sudden reversal of capital inflows.

Budgetary challenges are concerning as spending increases are already entrenched for the coming years, given effects of higher-for-longer rates (10-year rand yields having stayed elevated at 10.9%), outstanding social-spending requirements (such as an extension of the Social Relief of Distress basic income), wage increases, and support for state-owned enterprises like Eskom.

Furthermore, added spending is crucial to counteract structural limitations such as on energy and infrastructure. The next government will thus have to balance growing budgetary stresses with the need to consolidate its public finances to ensure debt sustainability. Scope is forecasting that general government deficits will average 6.3% of GDP from 2024-29.

Our budget projections might see further stress under a scenario of EFF or MK entering government. Conversely, a government involving DA may see deficits narrow.

Scope is next scheduled to review South Africa’s credit ratings by 13 September 2024. A less coherent government and specifically any further impairment of economic and/or fiscal challenges might place at risk the Stable Outlook assigned to the ratings.

Podcast: Scope’s Dennis Shen and Thomas Gillet join Tellimer Insights to discuss the elections (recorded 31 May 2024).

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