Policy uncertainty in SA increased, but GNU could be positive influence

Given the uncertainties that weighed on business and the market sentiment around South Africa’s recent elections, it was no surprise that policy uncertainty increased further, although the Government of National Unity (GNU) could change the picture significantly in a positive way.

According to the NWU Business School Policy Uncertainty Index for the second quarter of 2024, policy uncertainty decreased to 68.3 from 65.8 in the first quarter, but the news about the formation of a GNU and the pending new cabinet came too late in the second quarter to positively influence the outcome for the second quarter.

The Index is published in January, April, July and October. An increase above 50 reflects heightened policy uncertainty, while a decline means reduced uncertainty. Policy uncertainty is seen to have important implications for business confidence and the investment climate in the country.

On the subject of the GNU, the report on the Index says it is still early days, while political pitfalls remain, as well as risks in what is still untested governance. “South Africa has, after all, embarked on a new political terrain where governance arrangements will have to be re-imagined afresh and negotiated at both national and provincial levels.”

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Four encouraging developments

The report points out that from an economic and business perspective, facilitating a lower policy uncertainty index and seeking better growth prospects could stem from the combination of these four encouraging developments:

• the initial positive response from business and the markets to the formation of the GNU
• the roadmap for the GNU outlined by President Cyril Ramaphosa in his inaugural address
• a strong commitment to implementing both existing and new growth-friendly economic reforms
• the GNU succeeds in creating a sufficiently powerful guiding and stable coalition to expedite such necessary reforms.

What is important now, according to the report, is that the GNU prioritises the higher fixed investment and real economic growth the country needs now. “If setting the broad national agenda for the GNU is now its main task, then staying on the right economic track is another crucial one. Therefore, a successful GNU must create a policy environment that raises the level of overall fixed investment that South Africa so badly requires to achieve higher job-rich growth.”

The report notes that the GNU nevertheless starts with several existing mechanisms and programmes that could expedite the outcomes needed for problem-solving in the country such as Operation Vulindlela.

According to the Bureau for Economic Research (BER), there is no need to reinvent the wheel as Operation Vulindlela has done a lot of the heavy lifting in terms of policy reform. “Then, there is also the recent collaboration of government and business to address the high-priority areas of energy, logistics and dealing with crime and corruption, which must continue and be accelerated.”

The revised National Development Plan (NDP), which has enjoyed the support of most political parties in parliament also qualifies as common ground where ‘sufficient consensus’ might be found and policy predictability encouraged, the report notes.

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Weak economy no help for policy uncertainty

It also points out that the key drivers of growth, such as fixed investment and consumer spending, have recently been significantly weaker. Nedbank previously reported a marked decline in fixed investment activity in both the public and private sectors in 2023 which the Bank expected would spill over into 2024.

However, Nedbank expected fixed investment to accelerate in 2025 based on renewable energy, stronger global growth and firmer commodity prices. Household and consumer finances also remained stressed under the impact of inflation, high unemployment and elevated interest rates for a longer period.

On the positive side, Eskom load-shedding has eased for now and together with the emergence of renewable energy projects and an initial reduction in backlogs at ports, these bottlenecks are now marginally less of a drag on SA’s economic performance.

Therefore, according to the report, the overall SA economy is expected to show some strengthening in the months ahead, but the recovery is likely to be an uneven one. Although South Africa’s GDP growth contracted marginally by 0.1% in the first quarter, the consensus forecast among many analysts is now for about 1% GDP growth for this year as a whole.

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Further policy uncertainty due to election

Professor Raymond Parsons, economist at the NWU Business School, says although the Index for the second quarter moved further into negative territory mainly due to uncertainties around the elections, the subsequent game-changing political developments in South Africa have nonetheless revealed a distinct shift in the business mood.

“A positive momentum has been generated by the outcome of the 2024 elections. Nevertheless, the dynamics of extended coalition government in South Africa are still untested in what are dramatically changed political circumstances.”

He says the challenge is now to consolidate a sufficiently powerful guiding and stable GNU that will expedite the implementation of necessary reforms.

“Many of the solutions lie hidden in plain sight. If the pending GNU cabinet can achieve real policy traction, a ‘virtuous circle’ might indeed be created in South Africa’s economic performance. The more reform gains momentum, the more policy uncertainty will recede and confidence in South Africa’s economic prospects will grow,” says Parsons.