JASON SWARTZ: How to prepare for the uncertainty of political coalitions in SA

The general election in 2024 is likely to be a watershed moment in SA’s political history that will reshape the trajectory of the political economy in the years to come.

Since the advent of democracy in 1994 the ANC has enjoyed an overwhelming majority, but this dominance has begun to wane. The party fell below 50% for the first time in the 2021 local elections.

This outcome was the catalyst for the introduction of arguably disastrous coalition politics at municipal level, and will most likely usher in an era of national coalition governments after next year’s elections. The slim alternative is that the ANC scrapes through with more than 50% of the vote due to an eleventh hour turnaround of its mishandling of the country’s multiple crises, or because the pre-election polls are simply wrong.

Nonetheless, it is fairly evident that the implications for a range of outcomes are divergent. As investors we need to go further than unpacking the fluid nature of election outcomes and subsequent coalition scenarios and focus more on the policy and market impact of these scenarios in preparing for this period of uncertainty.

The ANC’s decline over the past decade has escalated as it faces internal struggles, intense criticism of endemic corruption and the failure of critical state-owned enterprises, Eskom and Transnet in particular. Adding to this has been a shift from the initial optimistic years of “Ramaphoria” to outrage over scandals such as the Phala-Phala saga.

All the while opposition parties have failed to benefit from this loss in support, with the DA losing votes to ActionSA, the Patriotic Alliance and IFP, and the EFF seemingly hitting a ceiling in its popularity. The result is a proliferation of smaller parties that have gained popularity, which has contributed to unstable municipal coalitions.

This fragmentation of the electorate has led to smaller parties forming coalition blocks, which makes it inherently difficult to reach consensus on policy and thus negotiate with larger parties. Often, smaller parties also find themselves in the role of “kingmaker” trading their support for powerful positions, leading to political power trumping governance.

In a study examining 24 democracies around the world it was found that Switzerland, Italy, Israel, Belgium and Norway had reduced policy changes as a result of having more than one party governing in government. Of course, it is naive to compare our democratic maturity to that of European countries that have found ways over centuries to make coalitions durable — including legislation, which is still lacking in SA. We are seeing some movement in SA towards tightening coalition frameworks, but this shift will take time and until then parties are inclined to renege on agreements for the sake of political influence.

Of particular interest is some sobering work by Heidi Brooks of the Mapungubwe Institute for Strategic Reflection. Her research looked at the conditions for unstable political coalitions and found that SA perfectly ticks all the boxes. One of the findings of the research was that there are three main underlying conditions that result in unstable coalitions: agreements between parties with vast ideological differences; countries where one party has been in power for an extended period; and weak and fragmented opposition parties.

As we face the reality of a high degree of uncertainty around the 2024 election outcome, we concluded that the best approach to our investment decision-making process would be to perform some election data modelling. Our approach started by assessing trends based on credible polling data to assign percentage votes to each party, and then simulate from those distributions.

Thereafter we took each result where the ANC could fall below 50% and scored potential partnerships that could combine to get 50% plus one based on how they have partnered at municipal level, as well as taking their public statements into account. We then ranked the highest-scoring partnership combinations and aggregated the best-ranked results. Based on this data, we surmised our base, bear and bull-case scenarios to assess the best possible market reaction in mapping out an investment case amid the current political uncertainty:

• Most likely (and base case) scenario: ANC falls marginally below 50%. This is a popular projection, as polling data has suggested party support should fall within a range of 46%-48%. The result would require modest trading for cabinet positions for the ANC to tip back over 50% through smaller party partnerships. The most likely candidates are the IFP and Patriotic Alliance. The former is more centrist and may offer some accountability, whereas the latter is more right leaning and is unlikely to contribute to the reform or anti-corruption agenda. The market impact should be neutral to marginally negative, as the reform agenda will continue to be slow and trend growth lacklustre.
• Second most likely (and bear case) scenario: ANC falls below 45%. In this scenario the ANC would need a larger coalition partner, with the most likely candidates being the EFF — requiring the trading of more significant cabinet positions — or a block of smaller parties. While the EFF and ANC do have some overlapping ideologies, their track record of working harmoniously together is poor. The EFF’s radical approach to economic and fiscal policy, and expectations that patronage opportunities will be prioritised above governance, will mean investors will justifiably put a significantly higher risk premium on SA assets were this partnership to come to pass.
• Least likely (and bull case) scenario: ANC falls below 40%. While this scenario has a low probability, it is worth viewing as a thought experiment. Here the ANC’s popularity at the polls plummets as severe punishment for failing to deliver on growth, jobs and services. The possible permutations here are an ANC-DA coalition (where the ANC maintains strategic cabinet positions), or the DA’s moonshot pact (now renamed the Multiparty Charter for SA), involving a coalition of the DA and all other parties excluding the ANC and EFF. Both options are a high-risk strategy for the DA as it faces the possibility of alienating its traditional support base should the coalitions fail. However, investor reaction would be positive given the DA’s unrivalled track record of accountability and service delivery.

Our research and analysis does not discount the possibility that the ANC maintains its majority in 2024 by the skin of its teeth. However, this outcome would result in a similar implication as that of our base case, which includes more of the same populist-inclined policies, reform inertia when it comes to the critical energy and logistics sectors, and yet more pedestrian growth.

Whichever way we look at it, the uncertainty remains the most damaging factor for markets.

• Swartz is portfolio manager at Old Mutual Investment Group.