Two key questions after the formation of the government of national unity (GNU) were whether its 32-person cabinet was fit for purpose and whether the business-friendly DA would be able to shift South Africa’s growth dial with just the six ministries it got.
Judging from the ongoing market relief rally, with the rand now consolidating at just below R17.50/$ and the JSE shooting the lights out, the investor community is happy with the GNU’s performance.
Real economic activity remains fairly subdued, however, suggesting that little has changed on the ground.
Most of the major post-GNU business surveys showed only a cautious improvement in sentiment during the third quarter. For instance, the third-quarter RMB/BER business confidence index edged up by a disappointing three points to 38. At best it revealed that for the first time since early 2022, most respondents expect business conditions to improve in 12 months’ time, instead of deteriorating further.
“The existence of the GNU is encouraging if only because the alternatives are all much worse,” says Ann Bernstein, who heads the Centre for Development & Enterprise. “The existence of the GNU provides some protection against government doing something really stupid or negative for the economy.”
More encouragingly, there was a record decline in the number of respondents in the Absa manufacturing survey rating the political climate as a serious constraint on their ability to invest.
The index fell by 25 points between the first and third quarters of this year — the biggest decline since the series started in 1992. In fact, the index hasn’t been this low in the past decade.
At the same time, despite business conditions remaining challenging, there was a marked uptick in the number of respondents in the same survey who are planning to increase their investment over the next 12 months. The index jumped from -20 points at the start of the year to +14 in the third quarter.
Bureau for Economic Research chief economist Lisette IJssel de Schepper says that while the positive jolt in sentiment is important to kick-start economic growth, it will not be enough if the GNU fails to lift some of the structural constraints holding back the economy. Sentiment could even sour if there is disappointingly little action.
“This is the crux — we need to see a sustained improvement in demand for sentiment to continue to improve,” she adds. “This would contribute to meaningfully lifting investment and employment [over time].”
Citi economist Gina Schoeman feels it’s far too early for the GNU to have had a direct impact on GDP growth. But she points out that rising confidence has already helped to lower the country risk premium, which has supported the exchange rate and reduced bond yields, helping to lower inflation and debt servicing costs.
Also positive is that the GNU has fostered healthy competition between ministers, which is important for raising efficiency, she says. The new DA ministers have provided “greater optimism” in some portfolios, either by making rapid changes or by speaking out frequently about the problems at hand.
She also considers it a plus that state-owned enterprises now report into their functional portfolios, especially as the new ministers of transport, Barbara Creecy, and of energy, Kgosientsho Ramokgopa, are seen as a particularly good fit.
Another positive is that the finance ministry continues to pursue fiscal consolidation with little to no new expenditure pressure from the GNU, given wide acceptance of the inefficiency of government spending.
The GNU’s acknowledgment of the importance of keeping up the government’s reform momentum under Operation Vulindlela has also been important, Schoeman says. This will have to be maintained, along with ongoing reform progress at Transnet and the continued cessation of load-shedding, for confidence to rise further.
Also needed, she feels, is a market-friendly medium-term budget on October 30 and more detail on the next round of Operation Vulindlela’s reforms.
Krutham MD Peter Attard Montalto says that while there has been little concrete action in the GNU’s first 100 days, there has been a welcome change in tone under Ronald Lamola at international relations & co-operation and Parks Tau at the department of trade, industry & competition (DTIC).
This is helping to repair geopolitical, business and trade relations, especially with the US.
He is also impressed by the “iron fist” Creecy has been wielding over a somewhat intransigent Transnet.
But he worries that these moves are largely unco-ordinated, and while this may be fine in the near term, it is not going to be good enough.
“The GNU needs an actual coalition agreement, not the hand-waving generalities of the statement of intent.”
Such an agreement would define the powers of individual ministers and specify where collective cabinet responsibility begins and ends — something that is becoming crucial to define, especially in the areas of foreign policy, education and the National Health Insurance.
An agreement would also lay out more detail on that part of the policy platform that is common across the parties and would provide more particulars about the way disputes will be handled in the GNU.
Attard Montalto expects such an agreement to be established before the state of the nation address in February 2025, given the need to write a new medium-term strategic framework. If it’s not in place by then, he will become “more concerned” about the GNU’s sustainability.
Bernstein, while rating the GNU’s performance as “promising”, also feels much greater progress is needed in speeding up fundamental reform to improve the business environment if South Africa is going to make any headway in increasing employment.
Like Attard Montalto, she will be watching Tau’s new broom at the DTIC closely to see if he can usher in reforms that could begin to shift the country’s growth prospects.
“The DTIC has been a big part of [the country’s] economic stagnation and decline,” she says, blaming its localisation policies, protectionism and interference in many aspects of the economy.
“It needs a radically different approach to the way it sees its role and in reversing many current policies.”