Exactly 30 years later, the ANC’s support slipped to 40.2%, ushering in the country’s first post-1994 multi-party 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 South African equity, bonds and the rand. There is some caution at first, but we believe the country has embarked on a journey that can gain positive momentum.

30 years of changing fortunes

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, yield 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 ruling party’s elective conferences for direction. This was revealed after 2009, when a more populist president, Jacob Zuma, was voted in. His ascent coincided with the global financial crisis of 2008/09, when governments needed to spend money implementing counter cyclical 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 SoE employees. As a result, SA’s debt-to-GDP soared.

In 2017, S&P was the first ratings agency to rank SA as sub-investment grade and in 2020 Moody’s was the last to downgrade the country to junk. Foreign investors exited South African bonds in droves, with their share falling from 44% to 25% of the total. It 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 sub-investment grade. The spread between SA and emerging market bonds and SA and US Treasuries widened. Today the debt to GDP ratio is over 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 back to win back its credibility. The markets are starting to reward them for that, although the broader politics sometimes gets in the way.