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Assessing and promoting civil and minority rights in South Africa.

[Source: BusinessTech.]

South Africans are overestimating the “good news” of the DA, EFF and smaller parties ganging up against the ANC, as the political and economic realities in South Africa have just become far more complex.

This is according to Nomura chief strategist for Africa, Peter Attard Montalto, who has provided a breakdown of the coalitions formed over the past few days, and a number of implications for investors looking to put money into the country.

Coming out of the coalition talks, The DA looks set to gain mayorship and a degree of control in major metros in the country – metros which control 85% of the municipal finance budget in South Africa.

This includes outright control of the City of Cape Town; coalition majority in Nelson Mandela Bay; and conditional EFF support in Tshwane and Johannesburg. There is also potential for a DA win in Ekurhuleni, Nomura noted.

However, despite this seemingly guaranteed outcome, the lack of EFF commitment to any side puts everything “up in the air”, and puts South Africa in an awkward position in many key areas.

These are 5 realities South Africans need to face about the outcome of the local elections, and what they mean for the immediate future of the country:

1. The EFF has become vital

The EFF, a relatively new party on South Africa’s political landscape, has gone from a minority of radicals out of the 2014 national elections, to a vital component of South African politics in 2016.

The EFF emerged as the kingmaker in the local elections, wielding enough power to sway council votes in favour of the DA or the ANC. The party has publicly stated it would support parties in opposition to the ANC – but would deal with votes on a case-by-case basis.

“The EFF therefore remains incredibly important,” Attard Montalto said.

Nomura noted that the EFF’s decision to stay away from coalitions came as a surprise, and would likely upset much-needed stability in key economic hubs such as Tshwane and Johannesburg.

Coalition make-up

2. Local government could be chaos

With very few outright majorities coming from coalitions in hung municipalities across the country, governance is going to be unstable, if not chaotic.

“Somehow nothing seems certain,” Attard Montolto said. “For example the EFF is asking for a different mayoral candidate for Johannesburg than Herman Mashaba, who ran for the DA in the elections.”

“There is the issue of the AIC and the uncertainty over how the EFF will treat each vote and the budget act in council adds uncertainty. Then there is the issue of the EFF’s internal stability – that is even before we get to the minutiae of the workings and stability of the DA coalition.”

The analyst said that we would have to wait until after the first council meetings and the elections of mayors to get a better grasp of how things will go.

“Ultimately, the need for service delivery may bring all opposition parties together, including the EFF, but this seems a challenge.”

3. The results are not exactly investor-friendly

Attard Montalto said that the market is still overestimating the ‘good news story’ from the local elections.

“For example, a minority DA government in Johannesburg hamstrung by the EFF vote-by-vote jockeying is at significant risk of being less of an investor-friendly outcome than the investor-friendly ANC mayor Parks Tau outcome,” the analyst said.

Where there could be a potential ‘good news story’ is the DA providing more efficient government and service delivery in Nelson Mandela Bay – but that is only because the party has the coalition power to make solid decisions there.

In economic hubs like Tshwane and Johannesburg, the outcomes are still very much up in the air, which is not an environment investors like.

4. The ANC’s response to the loss will be damaging

“Markets are underestimating the chances of an ANC policy reaction to regain support, a reaction, which is directly correlated with the number of metros they lose,” the analyst said.

This response has already been seen taking place: soon after the election results were announced, the ANC executive moved to a 4-day meeting to discuss the outcome.

Coming out of the meeting were plans for the party to refocus its policies in a more populist direction – almost echoing the narrative of the EFF – specifically to restructure budgets to assist the poor and focus on job creation.

While these policies are nothing new, the big loss in the local election may push the ANC to pursue the populist route more aggressively – something ratings agencies earlier in the year warned the party against doing, as it would cost the economy dearly.

A more populist ANC still in power nationally, could have a more damaging outcome for the economy, and is one of the elements Nomura projects will send the rand to R17 to the dollar by year end.

5. Things aren’t going to change for a while

While the election results dawned a new, complicated period of politics for South Africa, the ANC remains very much in power, has rallied behind president Jacob Zuma, and looks set to follow its political path into 2017.

Nomura noted post-elections that Zuma has shown he is in control of the party, and would likely stay as president to 2018 before his preferred successor takes over.

“Fundamentally, we think markets are overestimating the chances of the ANC losing power nationally and in Gauteng in 2019 under a new ANC leader,” Attard Montalto said.

“As we published after the elections the status quo is here for some significant time to come, and may turn out to be more messy than expected.”

South Africa at a Glance
58 780 000 (mid 2018 estimate)
4.5% y/y in June 2019 (CPI) & +5.8 y/y in June 2019 (PPI)
-3.2% q/q (1st quarter of 2019)
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