The South African elections are nearly upon us. Media scrutiny is already intense. 

It’s likely the African National Congress (ANC) – the party of Nelson Mandela – will lose its majority for the first time since the country moved from apartheid to democracy in 1994. A coalition government is coming. But how might that look in practice? And what could that mean for South Africa and investors in the African nation?

What’s at stake?

South Africa faces numerous challenges. Economic growth is anaemic, while a third of the country’s workforce is unemployed. Frequent power cuts disrupt daily lives; water infrastructure is under strain. Corruption continues to undermine governance.

True, the ANC has made incremental progress on these issues, but its support is waning. So, where does that leave us?

The likely coalition and its implications

The Democratic Alliance (DA) is the ANC’s biggest rival. A white liberal party, it recently made (failed) overtures to black voters. The DA is the majority party in the Western Cape province and is broadly seen as capable administrators. Historically, it has said it will never do a deal with the ANC. That rhetoric, however, has softened somewhat. This is partly to prevent the ANC from uniting with the Economic Freedom Fighters (EFF), a populist, left-wing and (to many) corrupt party.

Other players include the Inkatha Freedom Party (IFP), the ANC’s favoured partner. And the MK Party, led by ex-president Zuma and currently hovering around 12% in the polls.

For markets, there are two optimal outcomes. First, the ANC secures 48% of the vote, retaining power and guaranteeing policy continuity (which is already moving in the right direction, although that’s an article for another time). Second, the ANC gets 40% or below. This would no doubt result in a coalition with the DA, with other parties waiting in the wings to make up the numbers.

The latter scenario is favoured by investors within South Africa, given the DA’s alignment with business interests and a more market-friendly approach. Questions, however, would hang over the durability of such an alliance.

What’s the likely outcome? Polls indicate the ANC's share of voting intentions hovering in the high 30s or low 40s but rising to around 44% once adjusted for likely turnout. There’s also evidence of a swing back towards the ANC from a daily tracking poll published by the Social Research Foundation. Furthermore, the final stages of the ANC's campaign will be characterised by free rock concerts and other get-out-the-vote efforts. Such populist moves could yet win over those voters sitting on the fence.

Muddying the waters is the nature of polls themselves – telephone versus face-to-face. The ANC’s vote tends to be underrepresented in phone polls. On the flip side, the DA’s support is often understated in face-to-face surveys. Additional polls are planned as election day approaches.

My view? A vote share in the mid-40s but below 45% means the ANC and IFP can’t just form a government. The ANC will need another strategy. A share this low runs the risk the party won’t have a majority in the revising chamber nor the National Assembly. It will be tempting for some in the ANC to unite with the EFF. Ultimately, though, I think an arrangement with the DA will be more palatable for the current ANC leadership. This might not be a formal coalition agreement. For instance, the DA might commit to not opposing the government in any ‘no confidence’ motions. They could also support finance bills, allowing the ANC to govern as a minority administration. Either way, I’m confident Cyril Ramaphosa will remain president after the election.

What might this mean for investors?

A coalition government, particularly one involving the ANC, DA, and IFP, presents both opportunities and challenges. On the one hand, this arrangement could promote policy stability and a more business-friendly environment. This could bolster investor confidence and foster economic growth. On the other hand, the complexities of coalition politics may introduce elements of uncertainty, particularly in policy implementation and governance.

What happens next?

When asked about the most significant challenge he encountered during his tenure as UK Prime Minister, Harold Macmillan famously responded, "Events, my dear boy, events.” And it is events that will test any coalition in the coming months. Indeed, we’ve already seen signs of renewed political violence in the run-up to the election. The next major hurdle will be the ANC’s elective conference in 2027. This would probably be Ramaphosa’s cue step down as the head of the ANC (if not before). New leadership would likely necessitate a change of coalition partners.

Whatever happens, we’re in for an interesting few years. A more competitive parliamentary system could mark the beginning of a new era for South Africa. The incentives for politicians will completely change, hopefully leading to improved governance and government. This would be a positive for South Africa, its people and investors.