Momentum Investments: Forecasting SA’s economic path post-elections

28 May 2024

In the wake of South Africa's pivotal national election, the nation stands at a critical juncture. Political decisions made now will significantly impact the economic landscape.

Source: Pixabay

Against a backdrop of global uncertainties and domestic challenges, the outcome of these elections is crucial for both the policy framework and for steering the trajectory of the country's economy.

This analysis, gleaned from insights shared during the Equilibrium Quarterly Bulletin webinar, offers a nuanced exploration of the intricate interplay between electoral dynamics and economic projections in South Africa.

As articulated by Sanisha Packirisamy, economist at Momentum Investments, during the webinar, “The outcomes of these elections will not just determine governance but also shape the economic trajectory depending on political players’ willingness and ability to take the difficult decisions needed to enable a higher level of growth while preserving fiscal prudence.”

Source: Supplied. Economist, Sanisha Packirisamy from Momentum Investments.

A few knock-on scenarios based on election outcomes: Based on an analysis by Standard Bank Group Securities (SBG), one plausible scenario foresees a continuation of the status quo, where the ruling ANC achieves between 43% and 47% of the vote and has to find a mid-sized coalition partner to help it get over the line.

In this scenario, Packirisamy said, “It is likely that the direction and pace of structural reform would be broadly kept intact given the closely linked ideologies of the ANC and the likely coalition partners under this scenario.”

In SBG’s analysis, should the ANC get less than 42% of the vote, Packirisamy says a plethora of election outcomes could evolve from there. She says the most market-friendly of these outcomes would likely be an ANC-DA coalition, under which the country would likely experience a step-up in governance and accountability, a crackdown on corruption, increased investor sentiment towards SA’s economic prospects and a revival in fixed investment.

“This would ultimately lead to a higher growth path for the country, enabling a reduction in unemployment and poverty,” said Packirisamy.

In the same breath, she outlined the potential economic impact of a coalition between the ANC and the EFF or MK Party. “In our view, this would result in the most economic damage given some of the more radical views expressed in their manifestos,” warns Packirisamy. “A shift to the left in policies could result in a souring of international relations with the West, and capital flight as confidence in SA’s future growth plummets.”

Source: Supplied. Thami Khoza, portfolio manager at Equilibrium

Economic climate vs political climate: According to Packirisamy, South Africa’s uncertain political climate casts a long shadow on the economy and has acted as a major constraint for investment prospects in the country for the better part of a decade.

She says the outcome of these elections will not just determine governance but also shape the economic trajectory depending on political players’ willingness and ability to take the difficult decisions needed to enable a higher level of growth while preserving fiscal prudence.

“South Africa's future hinges on bridging socio-economic divides, navigating logistical hurdles, and harnessing the power of a politically engaged and empowered society.”

Markets priced for volatility

Although markets have maintained their bullish trend in the first quarter of 2024, Thami Khoza, portfolio manager at Equilibrium, an independent discretionary fund manager discussed how the upcoming local elections might impact market sentiments.

According to Khoza the performance of different asset classes varied across the globe, but locally, the Johannesburg Stock Exchange (JSE) struggled with declines in the financials and resources sectors.

Khoza says, “Upside risks to the inflation outlook, however, continue to stem from a weaker rand and geopolitically driven higher global food and oil prices.”

Khoza noted that over the last 12 months to March 2024, local bonds under-performed long-term assumptions due to local election fears and a resultant sell-off in the asset class. The realised returns relative to expected returns in local equity may be indicative of a long-term structural change in the return potential of this asset class.

“The remaining asset classes either performed in line with or outperformed the long-term expected returns.”

Ultimately, Khoza said, markets are, as always, threatened by a multitude of economic, political, and geopolitical risks (like elections) which could lead to volatility ahead.

“It is important to remain focused on the long-term investment objectives and not to be too distracted by short-term noise. If there hasn’t been a change in investor circumstances, the importance of staying invested cannot be emphasised enough,” she concluded.

The election is economic

As South Africa embarks on its electoral odyssey, the convergence of political dynamics and economic imperatives underscores the inseparable link between governance and economic wellbeing.

Amid the vagaries and complexities of the political landscape, Packirisamy says one certainty prevails – the decisions made after the elections will reverberate across the economic spectrum, sculpting the future trajectory of South Africa's economic journey.