Investment Implications For A Government of National Unity

The South African government of national unity (GNU) has been formed. Will it fall apart, or will it hold firm? What are the implications for financial markets, particularly bond markets?  

History is dotted with examples of GNUs that preceded times of transition on the African continent. Some were successful and others less so. For example, Zimbabwe’s GNU, formed in 2009, ended in political violence. It was marred by power struggles, corruption and human rights violations. In contrast, the GNU formed in Kenya in 2008 put an end to the post-election violence at the time and led to the implementation of constitutional reforms and fostered national reconciliation.

South Africa formed its famed GNU in 1994 as it transitioned from an apartheid regime to a democratically elected government. The GNU was led by President Nelson Mandela and included representatives of the former ruling National Party and the Zulu-based Inkatha Freedom Party.

This time, we find ourselves with another GNU, under different circumstances. With the ruling ANC failing to achieve a majority vote in this year’s national elections, it has resorted to forming a GNU. This includes the DA, IFP and several smaller parties, but excludes significant parties (in terms of votes garnered) such as the MKP and EFF.

The current configuration of the GNU has been well received by the market on the basis that it points to policy continuity and may result in increased accountability within government with diverse political parties forming part of the government framework.

On the other hand, the ideological differences between the ANC and the DA (in particular) may cause ructions in both parties. Within the ANC, factional fault lines risk being exposed, particularly when ideological compromises are made to accommodate ‘opposition’ parties. The DA risks alienating its voter base if it is seen as cosying up to the ANC in the name of power and positions. Both parties are expected to walk a tight rope now that they’ve formed a government.

Investment implications

The investment implications of a GNU are almost always context dependent. The short-term intention of the GNU is to bring  stability and political unity. A cooperative government is generally viewed with optimism and engenders investor and business confidence. Conversely, the complexities inherent in a GNU, especially one that is poorly managed, risks creating investor uncertainty.

South Africa’s GNU between 1994 and 1999 was marked with optimism and an increase in foreign investment. The stability provided by the GNU during the transitional phase helped reassure investors. However, over time, we have observed both locally and elsewhere, how underlying tensions, political infighting, and a lack of policy coherence can eventually dent investor confidence.

In Our Favour

In South Africa, the expectation is that a successful GNU could see a continuation of growth enhancing economic policy. Economic reform initiatives such as project Vulindlela, which has begun showing signs of progress, are expected to continue. The lack of individualised political power may result in a more diverse and collective view on policy development and decision making on key issues. Additionally, a more equal distribution of power also opens the possibility of increased accountability as no individual political party can enforce policy outcomes without broader consultation - and each political party can be reprimanded by the others if it steps out of line.

 These are all positives that should result in lower risk premiums and increased capital inflow.

Impediments

Unfortunately, politics is never that simple. The adage ‘too many cooks spoil the broth’ rings true as a GNU requires extensive consultation and broad consensus on key issues, resulting in delayed decision making. Where there are disagreements, a dispute resolution or deadlock breaking mechanism would need to be put in place. Markets are sensitive to political uncertainty, especially in an economy such as ours, where politics plays such a pivotal role in the overall outlook. Ideological differences on key issues are bound to create contention and conflict, which in turn, will put pressure on the dispute resolution mechanism. Signs of a political and policy division in the GNU could make for a bumpy ride over the coming five years.

Investors will be affected by this uncertainty unless the GNU can demonstrate its ability to work in a unified manner, especially in the near term. Recent rumblings as political parties jockeyed for cabinet positions may prove to be the “canary in the coal mine”.

Bond Market Outlook

The local bond market has rallied aggressively amidst a more certain political outcome. With Cyril Ramaphosa and Enoch Godongwana being reappointed as President and Minister of Finance, respectively, expectations of policy continuity from a fiscal and monetary perspective have spurred a strong 100 basis point move lower in bond yields across the yield curve. With bond yields now closer to fair value and the political uncertainty largely out of the price, attention will shift back to the fundamental outlook, but with a beady eye remaining on political developments.

Infrastructure Outlook

Infrastructure reform, particularly in the energy and transport sectors, will be key to improving South Africa’s growth outlook. If South Africa can achieve consistent real GDP growth of 3% and above, then stabilising the elevated +70% gross debt to GDP ratio becomes a very likely scenario. If you add in a possible improvement in the rating outlook and South Africa’s removal from the FATF grey list, then we have a recipe for significantly improved investor and business confidence.

In Closing

The fact that the ruling party willingly accepted the election outcome despite losing an outright majority, after having held it for 30 years bears testament to how far we’ve come as a democracy. The speed at which the GNU was formed, despite ideological differences, also indicates a level of political maturity among South Africa’s major parties. Ultimately, the next five years will either tell a story of political disorder and division, or one of unity and strength.