Fitch Ratings has warned that the ANC’s pursuit of coalition partners to retain its governance mandate, after plunging below the required 50% majority threshold, could significantly affect South Africa’s credit profile.
President Cyril Ramaphosa’s ANC polled 40% of the May 29 ballot, leaving it in need of forming a coalition with rival parties.
At the same time, SA’s economy is unstable amid sluggish economic growth and a precarious credit profile.
Although markets and the rand have been holding steady amid growing sentiment that the politically unlikely coalition with the DA was business- and investor-friendly, the permutations have been ushering in a certain degree of uncertainty.
“The various permutations of government could have very different implications for policy, with potentially significant effects for South Africa’s credit profile,” Fitch Ratings said yesterday.
The ratings agency affirmed South Africa’s rating at BB- with a stable outlook in January.
However, it stated that a further significant increase in government debt-to-GDP or a further weakening in trend economic growth that undermined fiscal consolidation and raised socio-economic pressures, could result in negative rating action.
Now, said Fitch Ratings, there were elevated risks that the weakened public support for the ANC in the recent election could incentivise the ANC to adopt short-termist policies to secure a coalition or win back public support.
Moreover, Fitch Ratings analysts said fiscal consolidation could also be affected although they believed that “the fiscal impact will depend on the arrangements that the ANC makes” in its big to retain its governance mandate.
With the ANC polling a significantly lowly 40%, the party now needs support from either the Democratic Alliance (DA), the uMkhonto weSizwe (MKP) or the Economic Freedom Fighters (EFF) in order to rule.
“Such backing could come through a coalition, or other means, such as agreements to provide support from outside government, or informal ad-hoc arrangements,” explained Fitch Ratings.
It added that an arrangement where the DA supports the ANC from outside government was more likely than a formal coalition between the two.
This was owing to the strong divergences between their voter bases on key issues, such as the direction of foreign policy, as well as historical factors.
Support for the ANC from the DA is seen enabling Ramaphosa to continue with policy priorities around tackling infrastructure issues.
This scenario was “likely result in the least significant changes to key credit metrics, such as South Africa’s debt trajectory, over the medium term, although fiscal tightening might be enhanced.
“The DA would likely try to lengthen the phase-in period of the National Health Insurance bill that was signed by president Ramaphosa shortly before the elections – a bill whose effects are not yet incorporated in Fitch’s forecasts.”
The MKP and EFF, on the other hand, were “populist parties (that) campaigned on radical agendas, with many shared elements” that include wide-scale land expropriation without compensation, nationalisation of key parts of the economy including mines, the central bank and large banks and insurers (as well as) halting fiscal consolidation and aggressively increasing social grants.
Fitch Ratings said South Africa’s debt trajectory would face additional risks if the ANC enters into arrangements that rely on support from the MKP or EFF.
“This outcome could also pose additional challenges to macroeconomic stability, for example if it led to a broad weakening of investor confidence or eroded governance.”
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