VICTOR MPHAPHULI: SA has trodden a long, hard path to get to a unity government

SA has come a long way since its first democratic elections in 1994, which brought the ANC into power with a 62.6% majority. Exactly 30 years later the ANC’s support slipped to 40.2%, ushering in the country’s first post-1994 multiparty government. 

This was a painful moment for the ANC, but an enormous relief for investors in financial markets, whose worst-case scenario from the election was a left-leaning coalition. Investors have cheered the outcome by buying SA equities, bonds and the rand. There was some caution at first, but we believe the country has embarked on a journey that can gain positive momentum. 

Immediately after winning the 1994 election the ANC faced a challenging environment, in particular the urgent need to set up new institutions, including an economic cluster. As a result of sanctions against the apartheid government it had been forced to reschedule its external debt. In the years after 1994, as the economy flourished, the new government managed to reduce the debt-to-GDP ratio. During Thabo Mbeki’s presidency, debt-to-GDP fell as low as 25%-26%. SA’s ratings were upgraded to investment grade, and we ended up being included in some of the global bond indices, helping to attract significant inflows into the country. The rand was stable, yields declined and borrowing costs were low. 

However, for the past 30 years the risk facing investors in SA has been whether the ANC could deliver a market-friendly president, and markets concentrated on the governing party’s elective conferences for direction. The ascent of a more populist president, Jacob Zuma, coincided with the global financial crisis of 2008-09, when governments needed to spend money to implement countercyclical fiscal measures to protect the economy.

At that time SA could afford to borrow, as its sovereign rating was investment grade and it had ample borrowing capacity. But borrowing is not a one-way street. When a government borrows it has to use that money for industrialisation and infrastructure to stimulate economic growth, create much-needed jobs and generate revenue to repay that debt. Instead, SA spent its borrowings on building a patronage economy, with ANC support bolstered by expanding social grants and wage increases for a ballooning public service, including employees of state-owned entities. As a result, SA’s debt-to-GDP soared. 

In 2017, S&P was the first ratings agency to rank SA as subinvestment grade and in 2020 Moody’s was the last to downgrade the country to junk. Foreign investors exited SA bonds in droves, with their share falling from 44% to 25% of the total. It consequently became more expensive for SA to borrow. In 2012, SA’s average bond yield was 8.5%. As bonds were sold off, yields rose to 13% during the Covid-19 crisis, which coincided with our downgrade to subinvestment grade.

The spread widened between SA and emerging-market bonds, and between SA and US treasuries. Today the debt-to-GDP ratio is more than 70% — a worrying level. We are relying on austerity measures even though the government will not use that term. The only positive throughout this mounting crisis has been the discipline and stability of the finance ministry, which fought to win back its credibility. The markets are starting to reward it for that, though SA’s broader politics sometimes gets in the way. 

This was the picture as SA voted on May 29. The outcome was that for the first time the fortunes of the country are no longer dependent on one dominant party but on a group of parties. SA is not out of the woods yet, but we can already see some blue sky. We believe if the unity government can work together it will reawaken the economy, which will make it possible to reduce the debt-to-GDP ratio, achieve fiscal consolidation and build for the future. As long as the central government exerts spending discipline and makes the necessary policy reforms, SA’s revenue generation will improve. There could be tailwinds for domestic assets over the next two years as global central banks continue to cut rates and stimulate their economies.

Some of the positive possibilities of an effective multiparty government are that it could in time recover the country’s investment grade credit rating, which would attract back foreign investment. The SA Reserve Bank would have room to cut interest rates faster than already anticipated. Instead of growing at zero to 1%, the economy can start to grow by 2%-2.5%, protecting the currency and the fiscus. A stronger currency delivers wealth effects for households as the GDP per capita increases and has effects across asset classes.  

For bond markets there is potential for 10-year bond yields to fall to 10% or lower and for the rand to strengthen towards R17 to the dollar. If the economy delivers growth, over time investor confidence will improve and businesses and asset managers will be encouraged to invest again in the domestic economy. Asset managers could even reallocate funds from offshore assets if they see better local opportunities, though this will be a slow process as the country will need to demonstrate credibility along the way. 

This hopeful scenario is completely dependent on the longevity and effectiveness of the government of national unity (GNU). It demands that all those involved in it to continue to work together for the betterment of SA. They have no choice. If they do not, history will judge them harshly and the electorate will judge them even more harshly.  

• Mphaphuli is head of fixed income at Stanlib.