South Africa’s economic prospects brighten with Government of National Unity

South Africa might see some much-needed economic recovery and reprieve as the government of national unity (GNU) takes form. 

This comes after the ANC confirmed that it would work with the Democratic Alliance (DA), Inkatha Freedom Party (IFP), GOOD and the Patriotic alliance in a government of national unity after it lost its majority in the pivotal May 29 elections. Collectively, the parties represent 273 seats in the National Assembly.

The decision to form a unity government was broadly welcomed by economists. 

Momentum economist Sanisha Packirisamy said there was uncertainty about what the election outcome would mean for economic reforms, but that the government of national unity brought with it an extra layer of accountability, creating some optimism. 

“Given that this GNU shows its affirmation of respect for the Constitution and wants to uphold the rule of law, we believe that there will be … broad stability in these institutions [the Reserve Bank, South African Revenue Services, treasury, the National Prosecuting Authority, the security cluster, the judiciary]”.

“So that is a positive for things like governance and accountability for South Africa,” she said.  

Markets and the rand rallied ahead of the first parliamentary sitting of the seventh administration last Friday. The Bureau for Economic Research said in a note that market sentiment appeared optimistic ahead of the first session, “reflecting confidence in progress towards a GNU”.

Mike van der Westhuizen, portfolio manager at Citadel Investment Services, said if the currency remains stable on the back of these political developments, then it will also give the Reserve Bank more room to cut borrowing costs, which have remained at 2009 highs for six consecutive meetings. 

South Africa’s GDP contracted in the first quarter of 2024, as interest rates continue to pour cold water on growth. The Reserve Bank expects the economy to grow 1.2% this year.

Before the elections, Momentum had its base case view at 1.8% average growth rate a year for the next five years. In this scenario, growth could reach the 2.5% mark in the outer years.

In its more bullish scenario, Momentum sees growth averaging about 2.4% during the next five years and reaching 3% in the outer year.

“I think it’s still early days and we need to see who is appointed in cabinet, how those cabinet positions will affect the reform agenda and who is in the parliamentary working committees,” Packirisamy said.  

“Broadly speaking, it can go in quite a positive direction. But it’s still early days to put all your chips into the bull case scenario. With the information that we’ve got, we are probably in a position where we are slightly better than our base case … But I’d say we are somewhere in between — shifting a bit more from the base into the bull — but very tentatively speaking.” 

With President Cyril Ramaphosa’s inauguration for a second term on Wednesday, focus will be on who he selects to be part of his cabinet. 

Some of the key portfolios to watch include energy, security and the finance ministry, Packirisamy said. Ramaphosa’s re-election could mean the same reform trajectory, but firmer implementation, she added.

“We think that this is good news for the international investor community. We think it’s good news for the local investor community for businesses to put down capital spending and to extend employment because of the future of the structural reform efforts.”

Analysts did, however, flag concerns about how Ramaphosa would navigate the new multi-party structure and the pace at which policies would be implemented.

“It is a bit more of a democratic way of doing it. You get more people on board and it would appease more constituencies of South Africa. And that I think is positive. The negative is that, to get to that point, there’s obviously more discussions. The policy delay can potentially be an issue because you have to get everyone on board,” Packirisamy said. 

Van der Westhuizen said that although South Africa revels in this “world cup win” feeling that has accompanied the unity government, disagreements between parties could be a problem.

“There’s a lot of debating and arguing that needs to go on within this GNU to get this policy to the table. And I see that’s sort of the headwind. It’s not going to be as easy as I think a lot of people think it’s going to be to get to a collective agreement on how things should be run.”

But with South Africa’s economy stuck with low growth, high unemployment and a relatively weak currency, there is a lot of room for improvement, Van der Westhuizen said.

“I think there’s great potential for a reinvestment in the country — for businesses to actually deploy capital that they’ve been holding on the sidelines. And then obviously for the regular man on the street, the consumer, just to be able to have that hope again,” he said.

“But we need to also see job creation.”