Markets have grown impatient with the political manoeuvrings of the parties involved with the Government of National Unity, dousing much of the hope and optimism that accompanied its formation two weeks ago.
This has been most reflected in the rand, which has returned to levels seen around the May 2024 National Election, when uncertainty and anxiety over the ANC’s historic loss at the polls was coming to the fore.
According to chief economist at the Bureau for Economic Research (BER), Lisette IJssel de Schepper, markets expected President Cyril Ramaphosa—who was elected thanks to his GNU partners in the DA—would announce the cabinet of the seventh administration during the week.
“This did not happen, and it is unclear when the announcement can be expected. Indeed, the lingering uncertainty, ‘leaked’ letters and increased worries about whether the GNU would hold meant that the rand turned impatient and, gyrating with the news cycle, steadily lost ground against the US dollar,” she said.
Various reports this week laid out the dirty laundry of the negotiations between the two biggest parties in the GNU—the ANC and the DA—with accusations and counter-accusations between the two that talks were being held in bad faith.
This includes claims that the DA’s demands for cabinet positions were ‘outrageous’ and that the ANC was being ‘arrogant’ and changing offers at the last minute. Overall, the leaked letters and media reports painted the negotiations as strained and on the verge of collapse.
In reality, the negotiations are ongoing. However, the outcome is far less certain than before—and questions will remain about whether the disparate views and ideologies of the GNU can actually govern together or if the same level of ‘chaos’ seen this week will colour all interactions going forward.
The proxy for these fears is seen in the rand, which is currently trading more than 40 cents weaker than this time last week, at R18.44 to the dollar.
While such volatility in the rand is not unusual for the currency—it has been weaker at times earlier in 2024 and the dollar is currently slightly stronger than it was at the end of May—the BER noted that higher local bond yields show the euphoria of last week has faded.
In all, the rand depreciated by more than 2% against the dollar, euro and pound relative to last Thursday. The 10-year government bond yield rose back above 10% yesterday and was up by 34bps w-o-w.
Last week, markets responded with elation at the formation of the GNU, with local assets rallying strongly and the rand breaking under R18.00 to the dollar.
Old Mutual Wealth Investment Strategist Izak Odendaal said that the GNU provides South Africa with a chance for real change and reform in the economy—and even if it doesn’t solve all or even most of the country’s problems, it could address a handful of big blockages that hinder economic growth.
However, he said that investors should be realistic about the GNU and its chances for success, noting that, even in a best-case outcome, it may not be around for a full five-year term, given the dynamics of the various parties involved.
IJssel de Scheppe said over the near term, the direction of local assets will likely continue to move with the political news cycle.
“The ultimate announcement of the cabinet will be important, but of course, the government’s ability to actually govern and the policy path pursued will be crucial in determining the long-term path of the economy and the attractiveness of South African assets,” she said.
The economist noted that a briefing on Operation Vulindlela (OV) this past week has highlighted the necessity of structural reform to accelerate economic growth.
“Structural reform, however, does not bring quick wins, and may even cause some short-term pain. However, as a first step, a sincere commitment from the government to embrace a continuation of OV could be a real positive for confidence, and improved sentiment could be really positive for the South African economy even over the short term.”
Read: Cabinet update: why GNU negotiations are on shaky ground
