Politics drove direction and sentiment in the South African government bond market in the second quarter of 2024.
After a precipitous fall in ANC support at the May national elections (with the ANC falling to 40%, well below the 43-47% base case many had expected), a government of national unity (GNU) path between the ANC and other parties tentatively began to be forged. This kickstarted what felt to investment market participants like a race against time, governed by the steady ticking of the procedural clock along Constitutionally laid out timelines, regardless of the hurdles different political parties attempted to throw in its path.
Given the tumult that SA investors have faced from political potholes in recent years, this steady ticking was somewhat comforting as this period of intense uncertainty was afforded only a limited timeline. Two material events culminated during the month of June – firstly a statement of intent drafted primarily between the ANC, IFP and DA allowed for the election of the President and the National Assembly Speaker (and Deputy Speaker) within the Constitutionally prescribed 14-day period – the first key hurdle passed. The second milestone was the (eventual) announcement of President Ramaphosa’s Cabinet at the end of June – but only after a fortnight of intense negotiations between the ANC and DA and a public spat over positions to be held in the new administration.
These events created both euphoria and anxiety in the bond market – yields initially weakened in early June as the ANC decided which parties to form an alliance with (being initially a binary option of selecting a primary partner in either the DA or EFF, with markedly different potential outcomes for SA’s potential economic growth path and fiscal fortunes), then rallied strongly as the ANC’s centre held and a broad DA/IFP alliance instead initially began to take form. Bond yields had another leg of strength once it became clearer that the GNU partners would assume executive roles within the Cabinet. Heightened anxiety towards the end of June saw another shift weaker in the bond market (as negotiations were beset by tensions, with the DA threatening to walk away) but this weakness was unwound into the new month on the announcement of the finalised Cabinet appointments.
Looking at developments through a bond investor’s eyes, the rally (move stronger) in bond yields is fully justified when viewed through the potential virtuous circle of a continuation (and possible acceleration) in structural economic growth reforms, particularly with Operation Vulindlela (OV) remaining in the safe hands of both the Presidency and the well-respected Finance Minister (with the reappointment of Enoch Godongwana to this role). Encouraging appointments to the Ministries of Home Affairs (for visa reform); DTIC (a revitalised and well-crafted trade policy would be highly impactful on SA growth); Communication (another OV priority); Electricity and Energy (a more clearly defined and separated portfolio and key to continue the drive for SA’s energy security); Police (essential to erode the deteriorating crime and corruption backdrop) and Transport (important for the implementation of reforms in the logistics sector) are all positive developments relative to the pre-election landscape.
A revival in investor confidence could result in a stronger currency, improved inflation outlook, increase in domestic and foreign investor investment and portfolio flows, stronger economic growth and job creation, lower government funding costs, better fiscal revenues and a healthier government fiscal outlook – this result would certainly sustain the current positive momentum in bond market sentiment over time. This effective virtuous cycle would also result in the long-held aspiration of inclusive growth, job creation and poverty reduction that has been the hope of all South Africans since the dawn of democracy.
There are of course many potential hurdles that could well result in this potential virtuous circle being either delayed or denied. With so many parties with such different political identities and personalities jostling for relevance, the most concerning near term obstacle could be ideological differences that abort the policy process and reform delivery from taking shape. The initial test of this will be the message received from the relevant parties as they emerge from the recently held Cabinet Lekgotla, which will form the basis of the State of the Nation address set for the 18th July. The Presidency has indicated that the choice of priorities for the 7th administration will be guided by their alignment to the goals of the National Development Plan (NDP) (Vision 2030). Despite some commentators pointing to this as a stumbling block where conflict amongst parties over policy will play out we think this is likely overstated as the NDP is a broad vision plan we would expect the majority of parties to already largely embrace from a high level perspective.
The NDP was a thorough and comprehensive long-term national development document (of almost 500 pages) established more than a decade ago to advise the President and Cabinet on ambitious long-term development goals and was a product of the National Planning Commission led by former finance minister Trevor Manuel together with Cyril Ramaphosa. A refresh of the document is long overdue, but the plan’s key focus to lift economic growth, investment and employment to reduce poverty and inequality remains overarchingly relevant. The private sector is seen to play a major role in achieving these objectives and there is an important focus on building a capable state. In addition to the NDP plan which lays out a vision for SA’s future, there is no need for Cabinet to craft new policy action plans to identify and implement the short list of urgent structural reforms required to grow SA’s economy. This is already in place under the enormously successful Operation Vulindlela (OV) – a reform implementation task team set up as a joint venture between National Treasury and the Presidency which has already seen some key early successes in transforming our energy, transport and telecommunications sectors, with water infrastructure and visa reform also on its initial to-do list.
So, SA has already identified the ‘what’ and the ‘how’ necessary to fix the economy and create jobs. All that is now required is accelerated implementation – and a refreshed GNU Cabinet with some healthy departmental competition may be exactly what is needed to energise policy reform and spur business confidence and investment, kickstarting the virtuous circle possible for a new South African chapter.
Article from Daily Maverick
.svg){kind=icon}
