The economic implications of South Africa's local government elections
Financial markets have absorbed the results of South Africa’s local government elections favourably. As of Friday morning, the rand was up slightly vs. the US dollar and the JSE was more or less at the same level as it was before the elections. According to the head of trading at a leading African securities brokerage the most important thing was that the elections were peaceful. I agree with that.
The local government elections are important from a national policy perspective
The build-up to the local government elections focused on whether the ANC would lose control of the Johannesburg, Tshwane and Nelson Mandela Bay metros to the DA or a DA-led coalition. However, the ANC and DA actually have a lot in common from a policy perspective. Both endorse the National Development Plan [“NDP”] and both put sensible policies like job creation, service delivery and reducing corruption as key features of their election manifestos. In my opinion therefore, the polls are more important because they are like a national referendum on the leadership and policies of President Jacob Zuma.
Former Finance Minister Trevor Manuel halved the level of national debt to GDP that he inherited from the National Party government and achieved a coveted investment grade credit rating for South Africa. However, since 2009 South Africa has made a significant economic policy shift to the left that has resulted in national debt almost doubling to around 50% of GDP and economic growth trending downward.
A slowdown in Chinese growth, decreasing commodity prices and the drought are beyond government’s control, but many of South Africa’s economic problems are also self-inflicted. State owned enterprises like Eskom have performed poorly, public sector wage settlements have been unrealistic and uncertainty around key policies like the mining charter have destabilised the economy. (Read more about growth in the Louwdown here, here and here)
Recently matters have escalated. Whatever your political views are on President Zuma, from an economic perspective his decision to fire Finance Minister Nene and replace him with Des van Rooyen was an economic disaster that cost South Africa nearly half a trillion rand.
This year elements of the ANC that want to preserve the status quo under President Zuma and those that want to make practical changes to protect South Africa’s credit rating (led by Finance Minister Pravin Gordhan) have been engaged in an indirect conflict through the state owned enterprises. The battle between SAA Chairwoman Dudu Myeni, a Zuma favourite, and Gordhan is a classic example of this. The local government elections were the first opportunity for the electorate to give an opinion on the economic direction that they want the country to take.
Any result that gave the ANC close to the 61.95% of the national vote that it achieved in 2011 would have been as an endorsement of President Zuma’s policies and would probably have given him the confidence to remove Gordhan. At the other end of the spectrum, a massive shift in the election results in favour of the DA would have been destabilising and could have resulted in social unrest. This is because many of the DA’s gains resulted from a low voter turnout by ANC supporters. Most South Africans still identify with the ANC, even if they didn’t get out and vote for them on the day.
Which opposition party people decided to vote for is also important. The DA is perceived as pro-business, while the EFF’s policies on the nationalisation of mines and expropriation of land without compensation are populist and would have a damaging effect on the economy in my opinion. It would have strengthened President Zuma’s position and put pressure on the ANC to adopt a more populist position if people deserted the ANC in large numbers to vote for the EFF. However, if the ANC forms a coalition with the EFF to gain control of large metros it may still result in a more populist stance.
As of midday on Friday 5th August 2016 (over 90% of votes counted) the ANC has won 54.44% of the national vote (down from 7.51% from 61.95% in 2011), the DA 26.24% (up 2.30%) and the EFF has secured 7.91% in its first local government election. Lets have a look at what these results mean for three critical aspects of our economy.
A weak rand tends to boost exports because it makes goods in South Africa cheaper compared to other countries, which is a good thing. A strong rand tends to decrease inflation and makes it easier to import equipment and machinery that we need to grow our economy. Overall, a stable currency is more important than the exact level because it allows business to plan ahead and gives confidence to investors. I believe the polls are positive for the stability of the rand because they were peaceful and because President Zuma probably does not have the support necessary to change finance ministers yet again.
South Africa’s Credit Ratings
South Africa faces an uphill battle to maintain its investment grade credit rating because of the poor growth outlook for the country. However S&P, one of the key ratings agencies, also looks at political interference in key government institutions (e.g. the Public Protector and the Judiciary) and the degree to which financially weak government related entities affect the national debt. In my view the election results strengthen Minister Gordhan’s position and are therefore supportive of his quest to prevent a downgrade. (Read more about South Africa's credit ratings in the Louwdown here and here)
Foreign investors crave stability. Interestingly, the increased competitiveness of the elections means that it is less likely that one party has sufficient support to make dramatic changes. The down side is that coalitions may find it harder to embark on large scale investment projects. The emergence of the EFF and the fact that nearly 10% of South African voters are in favour of their policies may also be a new area of concern for foreign investors. These factors may weigh on foreign direct investment.
Overall I believe that the local government elections have produced a “Goldilocks” result. The results are just enough to put pressure on President Zuma to scale back his agenda, but also not dramatic enough to be socially destabilising. Lets hope that governing coalitions are formed quickly and that politicians from all parties embrace the country’s need for stronger economic growth.
(Sources: ANC, DA, Fin24, Trading Economics, Fin24, FT, IEC, Business Day, Business Report)
Dr Andrew Louw CFA