It beggars belief that a political party that has overseen a ten-year period of systematic and wanton destruction of state-owned entities and public sector institutions, together with the massive enrichment of the political elite, should be set to win the next election.
Realistically though, the ruling ANC is the only party capable or likely to secure a strong majority. Therefore the market will be less concerned with who is going to win the election than with what the subtext is, and in particular how the Economic Freedom Fighters (EFF) fare. The EFF is a far left party formed by the expelled former ANC Youth League President Julius Malema. Malema is a controversial figure who uses populist rhetoric to attract support and the EFF is the only major party expected to increase its number of seats in parliament.
In 2014 the EFF won 6.35% of the vote, equating to 25 seats. It is a party with a history of violent behaviour and intolerance against critics and other races. It is the architect behind the “land expropriation without compensation” initiative, which it subsequently forced the government to adopt into law. This alone illustrates just how much influence the EFF has on ANC policy. The EFF slogan for the coming election is unambiguous: “Our land and jobs now”.
President Ramaphosa’s ruling ANC will be mindful of the EFF’s growing popular support. A strong performance by the EFF at the polls next month will drag ANC policy further left, at precisely the time when it should become more market friendly to tackle the decline facing Africa’s most advanced economy.
The hope of a much-needed economic reformation under Ramaphosa following his appointment as President in 2018 has cooled significantly, as the sheer scale of the challenges has emerged. One of the greatest current challenges is Eskom, the state owned electricity utility. Eskom has debt of more than R450 billion (USD40.2bn), as well as being hopelessly over-staffed and mired in corruption charges. It is struggling to operate its aging coal fleet and cannot support interest costs. The Government was forced once again to step in over the Easter weekend and hand over money from its emergency fund to avert disaster. The amount is reported to be R7bn and brought the Rand under immediate pressure.
Ramaphosa and his team are hard at work trying to stabilise Eskom. It was announced that, after the elections, Eskom will be restructured into three separate entities: generation, transmission and distribution. This strategy is not guaranteed and will meet with substantial resistance from key players. Government support wants to save money and keep the lights on, labour unions want to stop retrenchments and win higher packages for their members, and the coal lobby wants to stop the growth of renewable energy. The EFF is whipping up support to counter any restructure, avoid job losses and protect the coal industry. This is sure to translate into more votes for the EFF.
South Africa now finds itself precariously balanced on a knife edge. Voters should look north to their Zimbabwean neighbours for lessons from the past. Zimbabwe’s economic ruin began with forced farm seizures in 2000, and in a mere eight years inflation hit 98%. Zimbabwe was forced to abandon its currency in favour of the USD. Once dubbed “the bread basket of Africa”, Zimbabwe saw food production collapse by 60%. South Africa must avoid a similar catastrophe.
A risk premium will likely emerge for Rand assets in the lead-up to elections, as investors become sensitised to domestic news flow. Global developments, including the trade war between the USA and China will continue to pose external risks. Alongside this, the termination of the waivers on the purchase of crude oil from Iran announced on Easter Monday by Donald Trump will set the stage for another difficult year for the SA economy as oil prices continue to rally.