Will market optimism around SA’s GNU last?

The local political landscape took centre stage last week, with market optimism around the GNU and the swearing-in of President Cyril Ramaphosa. Now the question is whether we are counting our chickens before they have hatched.

Last week marked a significant turning point for South Africa as the newly formed Government of National Unity (GNU) held its first parliamentary sitting. This political development has been met with an overwhelmingly positive response from financial markets, indicating a renewed sense of optimism about the country’s future, Bianca Botes, director at Citadel, says.

The Rand, the JSE and the bond markets all saw substantial gains, reflecting investor confidence in the potential for economic reforms and stability.

Botes says the Rand appreciated notably, reaching its strongest levels in 11 months after experiencing significant volatility around the election period. This strengthening momentum was largely attributed to the peaceful formation of the GNU, which eased investor concerns about political fallout.

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However, it seems that there is already a deadlock in the GNU, with the parties struggling to find an agreement on the composition of the cabinet. The Rand lost ground in Asian trade and investors are keeping a close eye on developments around the formation of the new South African cabinet. The Rand started the day trading at R18.03/$, R19.27/€ and R22.79/£ on Monday.

The Rand blew off some steam, ending a four-day run of gains, to edge above the R18.00/$ mark once more last week, but Botes says even with the weakening witnessed on Thursday, the Rand remained near seven-month highs.

Investors are watching and waiting to see what happens

“Investors awaited the President’s cabinet appointments and adjusted expectations for the South African Reserve Bank’s interest rate-cutting cycle, now likely delayed to November amid persistent inflation challenges.”

Equities also experienced a significant boost, with the JSE-All Share Index climbing 2.75% on Tuesday. The bond market followed suit, with the yield on the 10-year government bond dropping below 10%, its lowest level since March, highlighting renewed optimistic sentiment towards South African government debt, fuelled by the favourable political climate, Botes says.

“The upbeat market response suggests a strong investor belief in the GNU’s ability to implement much-needed reforms. These include measures to curb state debt, address power shortages and fix logistical issues that plagued the country’s economy. The exclusion of radical parties advocating for land expropriation and nationalisation of key industries has further bolstered investor confidence.”

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She points out that foreign investors, who were net sellers of South African shares for an extended period, also showed renewed interest. “This positive shift in market sentiment is widely expected to reignite capital inflows into South African equities. According to global rating agencies, the new government’s agenda to prioritise structural reforms is seen as favourable for the economic and fiscal outlook, as represented in the gains in both the local currency and bonds.”

All eyes are now on who will be in new cabinet

After the inauguration of the president, the focus now shifted to his cabinet appointments. Botes points out that these choices will be crucial in determining the new government’s ability to deliver on its reform promises.

“Investors will, in particular, be keen to see how the GNU will navigate potential tensions and policy differences, especially between the ANC and the DA.”

However, Botes warns that despite the positive outlook, challenges remain. “The unified government must address South Africa’s deep-rooted economic woes, including high unemployment, inequality and poverty.

“The GNU’s approach to these problems is expected to mirror the centrist policies of previous ANC-led governments, with an emphasis on private sector involvement and infrastructure development through initiatives like Operation Vulindlela, which is a joint initiative of the Presidency and National Treasury to accelerate the implementation of structural reforms.”

She says there are also concerns that significant fundamental differences between GNU partners could lead to friction. The ANC’s commitment to affirmative action and Black Economic Empowerment (BEE) policies contrasts with the DA’s free-market stance.

“This ideological divide will test the GNU’s members’ ability to work together effectively. The contentious issue of land reform, in particular, could become a flashpoint, as the ANC and DA have vastly different views on addressing racial disparities in land ownership.”

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Foreign policy could also be a problem for the GNU

Botes says foreign policy could also be a source of discord. “The ANC’s alignment with countries like Russia and China contrasts with the DA’s preference for stronger ties with Western allies. This could lead to debates over South Africa’s role in international institutions like BRICS and its stance on global geopolitical issues.”

For now, however, Botes says optimism is the order of the day and with government cohesion and dare we say, a little sheer luck, the next five years might prove fruitful for the embattled economy and social fabric.

“Investors are optimistic about the potential for reform and stability, which is crucial for long-term growth. The test of the GNU’s success will depend on its ability to manage internal differences and implement effective policies. As the world watches, the coming months will reveal whether this newfound optimism is justified or if the challenges ahead will dampen the initial euphoria,” says Botes.