Risks from May election contributing to policy uncertainty in SA

Risks from the May elections re contributing to policy uncertainty in South Africa, with an index that measures policy uncertainty edging further into negative territory. The prospect of political shifts in the country after 30 years of dominance by the ANC governing party has opened up several new areas of uncertainty not experienced since 1994.

The NWU Business School’s Policy Uncertainty Index for the first quarter of 2024 edged further into negative territory to 65.8 from 65.5 in the fourth quarter of 2023.

Professor Raymond Parsons, economist at the NWU Business School, says policy uncertainty has loomed large in much of the recent economic debate in the country, as it is regarded to have important implications for business confidence and the investment climate in the country.

“There have been many manifestations of policy uncertainty in South Africa over the years. The institutional setting and policy-making environment clearly influence the extent to which negative shocks and developments lead to bad outcomes and tough policy challenges.”

ALSO READ: Load shedding, election will play major role in outcome of economy – experts

Correlation between policy uncertainty and economic outcomes

He says interesting correlations have been found between the policy uncertainty index and economic outcomes. “Empirically, it shows that when economic policy uncertainty is strongly present in the environment, it indeed lowers investment, employment and output.”

This time the upcoming election is looming over the usual calibration of policy uncertainty, he says. Global research shows that in many countries policy uncertainty indices tend to spike when elections are due but Parsons says there are distinctive features that differentiate the extent to which the 2024 elections in SA will affect the uncertainty profile of the economy.

He points out these five specific factors that combine to raise the level of uncertainty surrounding the 2024 election outcomes:

• according to several recent authoritative opinion-based surveys, support for the ANC governing party is likely to dip below 50% nationally and provincially
• the political environment is generally more competitive and volatile due to new opposition formations
• individual candidates may now participate in the proportional electoral system without belonging to a political party
• current support patterns suggest a governance shift into coalition territory at both national and provincial levels, which has (so far) brought much unpredictability and instability to local government and metro-politics and;
• political analysts and recent opinion surveys remain strongly divided on the likely election outcomes.

ALSO READ: The curse of South Africa’s coalitions

New political terrain with coalitions

Parsons says the real prospect of yet further coalition arrangements at various levels of governance is new political terrain for South Africa.

“The challenge must nonetheless be successfully tackled and governance frameworks must be reimagined.

“It remains to be seen what governance solutions could emerge to deal with a likely shift in South Africa’s political economy. Although the economy will nevertheless continue its daily activities, political factors have now induced a tangible precautionary stance among investors and the markets.”

He says on the positive side there are a number of reform initiatives already evident in some key policy areas, such as energy, logistics and transport, as well as crime and corruption, which could become important tailwinds to drive this year’s growth prospects.

The role of the private sector remains indispensable in this instance. “If it is steadily and visibly implemented, the reforms are the steps needed now to build South Africa’s economic resilience, irrespective of the 2024 elections.”

ALSO READ: SA dodges recession by 0.1% GDP growth in fourth quarter

Geopolitical risks and uncertainties also feed policy uncertainty

Parsons says geopolitical risks and uncertainties also persist, which also influences policy uncertainty.

“In particular, in the first two months of 2024, Red Sea shipping disruptions caused Suez Canal trade to drop by 50% from a year earlier, while trade through the Panama Canal fell by 32%, obstructing supply chains and disturbing macroeconomic indicators.”

The South African economy also continued to grapple with domestic and global headwinds during the first quarter. Parsons says gross domestic product (GDP) growth is likely to be about 1% in 2024 (after 0.6% in 2023) but the economic recovery will be uneven.

Household finances remain under strain, with surveys by Nedbank and Absa indicating that recent fixed capital formation (GFCF) trends have also been weak, although Nedbank expects GFCF to accelerate in 2025 based on renewable energy investment, stronger global growth and firmer commodity prices.

In addition, the South African Reserve Bank’s Monetary Policy Committee (MPC) again decided in March to keep borrowing costs unchanged for now, with inflation risks still seen on the upside. However, interest rates seem to have peaked and barring shocks, rates could begin to ease in the second half of 2024, Parsons predicts.

ALSO READ: Fitch Ratings calls Budget optimistic; analyst says it was compromised

High sovereign credit risks also cause policy uncertainty

“The 2024/2025 Budget was also seen as providing evidence of the National Treasury’s determination to keep a ‘debt trap’ at bay through a combination of spending decisions, debt management steps and tax adjustments to ‘balance the books’. The Budget Speech acknowledged that ‘a high sovereign credit risk’ remains a challenge to be wound down over the next few years.”

Parsons points out that there are a number of important reform initiatives already evident in some key policy areas, such as energy, logistics and transport, which could still be key tailwinds to drive this year’s growth prospects.