GNU good for Rand and markets, now for the new cabinet

Forming the Government of National Unity (GNU) was good for the Rand and the markets this week and all eyes, including those of investors, are now on the new cabinet that will hopefully be announced soon.

Investors are interested in who will run the show and make the policy that will make it easier or more difficult to do business in South Africa.

Lisette IJssel de Schepper, chief economist at the Bureau for Economic Research at Stellenbosch University, says after some hesitant gains ahead of the election and then struggling to find direction, markets piled into South African assets this week.

“Positive local economic data played along and global dynamics did not derail the optimism towards South Africa. The Rand strengthened below R18/$ for the first time since August 2023, stocks surged and bond yields declined (which is a good thing) amid strong demand for local bonds.

“Long may it last, but the keenly anticipated announcement of the cabinet will be pivotal in determining sentiment going forward, at least in the near term,” said De Schepper.

It has been two weeks since the African National Congress (ANC) put forward the Government of National Unity (GNU). Since then, several parties agreed to the deal and some general guidelines were made public. However, a lot still needs to be firmed up and a lot of agreeing and disagreeing will still take place as the GNU tackles tough policy choices and governs the country, she says.

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New cabinet is the next hurdle for the economy

“The next hurdle will be the composition of the cabinet and simply put deciding who gets what. Markets will find comfort in a balanced cabinet with component ministerial appointments. On the flip side, any signs of public dissent within the GNU will be unsettling. Some expect the announcement as soon as today, but there is no constitutional requirement on the timeframe,” she says.

The Rand exchange rate appreciated by more than 2% against the dollar, euro and pound from last Thursday. She says the Rand closed at below R18/$ for the first time this year on Wednesday but pulled back a little on Thursday.

After reaching an intraday high on Wednesday, the JSE ALSI also lost some of its gains on Thursday but still closed almost 5% higher.

Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, say the Rand was boosted by positive sentiment following the formation of a GNU, which helped to dampen the political uncertainty that arose after the announcement of the election results.

“The local currency broke through R18.00/$ against the dollar for the first time in 10 months, and it is trading around R17.98 this morning. Over the coming days, the local unit’s direction will be determined by the composition of the national cabinet, which the president is expected to announce over the weekend.”

Inflation is getting there slowly

After headline consumer inflation came in unchanged at 5.2% in May, Matshego and Nkonki expect inflation to remain sticky at around 5% until the end of the third quarter. “The moderation in food prices will likely slow as the impact of last year’s favourable base fades, the rate of decline in global food prices slows and the lagged effect of drier weather conditions this summer starts to filter through the supply chain.”

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They also believe that fuel prices will exert mild upward pressure, with the unfolding geopolitical conflicts preventing a faster decline in global oil prices. “We forecast inflation to decelerate to below 5% during the fourth quarter, end the year at around 4.6% and average 5.1% for 2024. However, there are still upside risks to our forecast.”

Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, say a colossal task awaits the seventh administration although the post-election democratic processes progressed smoothly.

“Financial markets reacted positively to the proposed GNU, with the Rand/US dollar exchange rate dipping below R18. Despite its traditional volatility, the Rand has made strides that suggest that the political risk premium has subsided.”

They say the president’s forthcoming announcement of his cabinet is now of paramount importance, particularly for the critical ministries of finance, public enterprises, trade, industry and competition, agriculture, land reform and rural development and international relations and cooperation.

“This announcement will provide further insight into the economic direction and priorities of the seventh administration under the proposed GNU. It will also offer a window into the measures taken to strengthen confidence in the state through the political heads of these various departments.”

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New administration must accelerate growth and jobs

While the previous administration made meaningful, yet incremental, progress in executing key reforms in energy, transport logistics, water, digital communications and visas, the seventh administration faces the significant task of not just accelerating reforms but doing it in a way that promotes sustainable and inclusive growth as well as job creation, they say.

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano also point out that there are two critical indicators that underscore a strong case for accelerating pro-growth reforms: unemployment and inequality.

“South Africa’s official unemployment rate remains structurally high by global standards. Currently, at 32.9%, the unemployment rate has increased from below 20% in the early 1990s. The youth (ages 15-24) face particularly tough economic and labour market conditions, with their unemployment rate estimated to be around 59.7% and those aged 25-34 experiencing an unemployment rate of 40.7%. South Africa’s working-age population is estimated to be around 41 million, yet employment is only about 40% of this figure. This paints a dire situation that needs urgent attention.”

They also point out that levels of inequality remain astonishingly high and disappointing. “Measured by the Gini coefficient, South Africa’s income inequality is estimated to be between 0.63 to 0.67, significantly higher than its emerging market peers where the average Gini coefficient is below 0.5.

“This shows that, since the democratic transition in 1994, the structure of the South African economy is still characterised by unsustainably vast income inequalities. The decline in GDP per capita over the past decade is particularly worrying and underscores that the economic pie is not expanding enough to cater for the population.”