The elections mark the first time since 1994 that the ANC has lost its outright majority, leading to great uncertainty about what the country’s seventh administration will look like.
The past week has been a frenzy of hypotheses and possible scenarios as various stakeholders tried to figure out what kind of coalition would take over, or whether we’d once again take the path of a government of national unity (GNU). Now that the ANC has chosen the latter, we have to consider what it will mean for economic policies.
Uncertainty is a trigger for investors, seen readily in how the rand trades against major currencies (all other factors held constant). A quick review of the elections held since 1994 shows that the rand has only seen post-election weakening twice: after the election that ushered in the ANC as the governing party and Nelson Mandela as president, and after the latest vote.
After all the other general elections, the rand remained largely stable, with instances of notable post-election strengthening in 2004, 2009 and 2014.
While the world was glad to see South Africa enter a democratic era 30 years ago, the change to what some may have described as an inexperienced government that would introduce dramatic changes to economic policy made investors nervous. They sought to protect their wealth, and capital flowed out of South Africa, weakening the currency.
The government that will be formed this year will have had no experience of working together.
Will there be a trade-off between the preference of the people and that of investors as the new government chooses leaders for its most important ministries?
A key contributor to investor confidence is the choice of leaders, as we saw with the replacement of Nhlanhla Nene as minister of finance in 2015 (the rand took a nosedive until the new minister, Des van Rooyen, was removed). However, will there be a trade-off between the preference of the people and that of investors as the new government chooses leaders for its most important ministries?
Policy uncertainty was certainly a factor in 1994, as it will be this year. The government that is formed may make significant changes to economic policies. There are economic policies that investors prefer, and these seem to contrast with the preferred policies of the people of the country.
The tension between the investor and the voter is policies. A majority of the vote went to left-leaning manifestos, but the preference of investors would be more “capitalist”. If votes went to capitalist manifestos, there would be no challenge. The issue for a GNU is balancing the divergent preferences of voters and investors.
History has taught us that whatever policy choices emerge, what is critical to investors’ confidence is policy clarity, certainty and stability. This is the case even if they do not like the chosen policy.
It is in the interests of the country that economic stability and potential growth be preserved, and ours is an economy that is sensitive to capital flows and investor sentiment. This makes what the world thinks important. Still, economic prospects must be balanced with socioeconomic considerations such as addressing inequality, human rights and improving employment without sacrificing workers’ rights.
Going back to 1994, it is worth noting that the ANC eased the fears of investors by refraining from immediate, dramatic changes to policy, and over time built investor confidence. It encouraged stable foreign direct investment versus liquid portfolio flows (FDI grew from $1.25bn in 1995 to $3.8bn in 1997 under the reconciliation and rainbow-nation narrative).
However, the economic ideologies of much of the country, or a good 65% of voters, has not changed in the 30 years of our democracy.
Has the ANC been punished for failing to deliver on the will of the people? Have voters turned to parties they feel are more committed to the cause?
It leaves an incoming GNU with a brave new challenge — finding a delicate policy balance that will keep the government honest to both investors and South African citizens.
• Makhoba is an economist and the lead specialist of research and analytics at Liberty, the insurance and asset management arm of Standard Bank
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