An ANC-EFF coalition could see the rand reaching R21.50, escalate inflation and fuel prices, and potentially lead to a debt crisis.

These predictions formed part of new research from Oxford Economics, which released the second of its four scenarios for South Africa’s general election on 29 May.

In this scenario, the ANC sees its share of the vote drop to 40%. An arrangement with smaller parties is no longer enough to give it a legislative majority.

It must make a deal with one of the two main opposition parties – the EFF or the DA – and chooses the EFF.

The ANC-EFF coalition has over 230 seats in the National Assembly and can appoint the president and government that the member parties agree on.

In the scenario, after some posturing and threatening, the ANC votes for the EFF’s choice of NA Speaker in return for the Fighters’ vote for President Cyril Ramaphosa to serve – or, at least, start – a second full term as president.

The “radicals in the red berets” demand and obtain positions in the economic cluster to advance their agenda of using the state to drive development and create jobs.

The ANC-EFF coalition is replicated in Gauteng and KZN, while in the Western Cape, the partnership, along with smaller parties, ousts the DA.

The EFF leaves most governance to the ANC but prioritises a few policies in alignment with the more statist faction within the liberation movement.

In this scenario, the relationship with the private sector becomes more adversarial.

The report said the first economic effect of the news that the ANC and EFF are forming a coalition government will be felt through asset prices.

As soon as the news comes out that the ANC and the EFF have agreed to combine in government, there is a selloff of the rand in currency markets.

The rand/dollar exchange rate will weaken in the second quarter of 2024 and briefly breach the R21.50/USD level in the third quarter.

While the rand will recover slightly from the overselling, it will remain lower than in the baseline scenario over the forecast period.

This is because private sector business investment could drop, and private sector investment growth flatline over the forecast period in response to investors’ expectation that the policy environment will remain uncertain at best and hostile to business at worst

Oxford Economics’ forecast in this scenario is for the rand to trade at R20.10/USD at end-2024 and at R20.50/USD at end-2027.

Equity prices will likely fall in Q3 2024, recording negative growth for 2024 as a whole.

However, because local stocks are already performing dismally and because most of the stocks on the JSE’s Top 40 index are basically stocks in offshore companies, share prices do not fall as hard as they would in a global financial shock.

The weaker currency will likely lead to fuel price increases, and transport inflation will steadily raise the consumer price index (CPI).

Oxford Economics’ forecast in this scenario is for CPI inflation to average 5.6% in 2025, compared to 5.0% in its baseline forecast.

The research found that inflation expectations could become unanchored, and after 2026, inflation could settle at a higher equilibrium level of around 6%.

Consumers will not be happy about rising costs, but the EFF could threaten action if the SARB were to raise interest rates further, so the best the central bank could do is follow the actions of the US Fed and the ECB.

Interest rates will eventually settle higher over the long term.

The new government’s more fundamental and longer-lasting impacts on the economy will result from its financial management and will only become apparent in the 2024 Medium-Term Budget Policy Statement.

Reprioritised spending announced in this statement could see grant payouts increase across the board, although, in the near term at least, the ANC may impose a degree of fiscal restraint, and the grants paid out are not the unrealistic ones proposed in the EFF’s manifesto.

The fiscal deficit could also widen in this scenario, from a forecast of 5.4% of GDP in 2024 to 5.6% in 2025, stabilising at the 5.5% level in the medium term.

As a consequence of these wider deficits, government debt as a proportion of GDP continues to increase, breaching 80% of GDP by 2027.

The effect will become more serious in the long term if the ANC-EFF government is re-elected in 2029 – government debt stock exceeds 90% of GDP by 2036 and 100% of GDP by 2043.

source of article:ANC-EFF coalition could see rand hit R21.50/USD – Daily Investor