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South Africa's ANC Faces Electoral Challenge, Potential Coalition with EFF Could Impact Fiscal Policy

ANC's potential coalition with EFF could destabilize South Africa's economy, facing a 32.9% jobless rate and 0.8% GDP growth since 2012.

By Athena Xu

5/15, 00:11 EDT

Key Takeaway

  • South Africa's ANC faces a historic electoral challenge, potentially leading to a coalition with the EFF, which could impact fiscal policy and inflation control.
  • Economic instability persists with a high jobless rate and low GDP growth, yet investors remain cautiously optimistic pending election outcomes.
  • Global investor confidence contrasts with US economic discontent, highlighting divergent perceptions on economic recovery and inflation concerns.

South Africa Faces Political Shift

South Africa's African National Congress (ANC), once led to victory by Nelson Mandela, is confronting a significant electoral challenge. Current President Cyril Ramaphosa's party, which previously enjoyed nearly 70% of the vote in 2004, is now predicted to fall short of the 50% threshold needed to govern alone in the upcoming May 29 elections. This potential shortfall could force the ANC to form a coalition government for the first time since apartheid ended, with the Economic Freedom Fighters (EFF), a far-left party advocating for the nationalization of banks, mines, and telecom companies, being a possible partner. Analysts from Capital Economics suggest that while radical policy changes may not materialize, such a coalition could lead to looser fiscal policy and undermine the Reserve Bank's inflation control, potentially aligning South Africa closer with China.

Economic Challenges and Investor Sentiment

South Africa's economy has been struggling, with a jobless rate that has surged to 32.9% from around 20% during the financial crisis, and GDP growth averaging just 0.8% since 2012. The fourth quarter of 2023 saw the economy barely avoid recession, with a GDP growth of 0.1%. Despite these challenges, Bloomberg Economics’ Yvonne Mhango suggests that major policy shifts are unlikely, regardless of the election outcome. Investors are adopting a wait-and-see approach, buoyed by improvements in infrastructure, easing logistics woes, and receding power outages. However, the South African rand and the nation's economic stability face tests depending on the election's outcome, with Bloomberg Intelligence’s Sergei Voloboev highlighting the currency's vulnerability to populist policies.

Global Economic Perceptions and Inflation Concerns

Globally, investors and the US electorate show diverging views on economic prospects. A Bank of America Corp. survey reveals growing investor confidence in a soft economic landing, with only 11% fearing a hard landing. Conversely, US polls, particularly from the New York Times, indicate widespread economic discontent among voters. This bifurcation extends to inflation expectations, with investors fearing resumed inflation while small business surveys reveal a mix of optimism and concern for the future. The upcoming US CPI data for April is highly anticipated, with potential implications for global markets and economic policies.

Street Views

  • Capital Economics (Neutral on South Africa's economy):

    "An ANC-EFF tie-up would almost certainly result in looser fiscal policy and steps that undermine the Reserve Bank’s inflation-fighting capacity. On the international stage, South Africa would probably move even further into China’s orbit."

  • Yvonne Mhango, Bloomberg Economics (Neutral on South African monetary policy):

    "Policy will likely remain broadly unchanged regardless of the outcome, allowing for ongoing reform efforts to be sustained. We are seeing gains on the infrastructure front. Logistics woes have eased. Power outages have receded. Interest rates will remain high for longer than previously expected, keeping consumption subdued. Spending on energy projects will keep investment activity robust."

  • Sergei Voloboev, Bloomberg Intelligence (Neutral on South African rand):

    "A populist turn following the elections could undo the rand, which has been a star performer among emerging currencies."