Daniel Makina, University of South Africa
Following the consummation of a Government of National Unity (GNU) and the election of Cyril Ramaphosa as President of the Republic in the first sitting of the National Assembly after general elections held on 29 May 2024, South African financial markets went into a state of “exuberance”. The JSE surged, and by 19 June 2024 when the President was inaugurated it achieved its highest index level breaching the 81 000 mark. In the bond market yields fell and prices rose, and new issues were oversubscribed. In the foreign exchange market, the rand appreciated and briefly falling below 18 to the dollar and becoming the best performing emerging market currency. This raised the proposition that financial markets are leading indicators of the future performance of the real economy for evaluation and validation. The question for consideration is: does the behaviour of financial markets really tell us a good story about the economy going forward? In other words, is their optimism sustainable?
In his memorable speech on 5 December 1996, Alan Greenspan, the Chairman of the Federal Reserve at the time, described US financial markets as exhibiting “irrational exuberance”. This was based on his concern over the rapid rise in asset prices in the stock markets during the mid-1990s. He questioned whether the surge in asset values in the stock markets reflected the fundamentals of the economy or if they were driven by overly optimistic investor behaviour. In essence, he thought that financial markets were becoming excessively overvalued, driven more by psychological factors and speculation than by sound economic fundamentals. During that time, stock prices, especially in the technology sector, rose to unprecedented heights as investors channelled funds into internet and technology stocks, the so-called dot.com stocks. This was done without evaluating their business fundamentals of these dot.com stocks. This speculative frenzy was driven by the belief that the internet and related technologies would revolutionize business leading to massive profits. The result of this “irrational exuberance” of markets ultimately led to a bubble and collapse in prices of technology stocks by the year 2000.
Unlike the American market “exuberance” driven by the promise of a profitable technology sector, the South African one stems from optimism following the formation of a GNU which markets viewed as business-friendly and reformist. There have been several examples when financial markets rallied following election of pro-business governments. Such election outcomes can significantly impact financial markets based on investor expectations of new economic policies and reforms. For example, when Donald Trump won the U.S. presidential election in November 2016, the stock markets in the USA rallied as investors became optimistic about his promises of tax cuts, deregulation, and increased infrastructure spending. Similarly, the Indian stock market rallied after the victory of Narendra Modi and the Bharatiya Janata Party (BJP) in the 2014 elections as investors anticipated economic reforms and pro-business policies under his leadership. Also, following the election of Jair Bolsonaro as Brazilian President in October 2018, Brazilian financial markets rallied as investors became optimistic about his plans to reduce the fiscal deficit, reform the pension system, and his promise to implement market-friendly policies. The question is: Are such market exuberances following favourable election outcomes sustainable or short-lived?
Empirical evidence suggests market exuberances following favourable election outcomes are generally not sustainable. Their longevity is dependent upon several factors. If the economy is not strong, market gains are more likely to be short-lived because markets tend to revert to their underlying economic fundamentals. The initial market’s reaction depends on the ability to implement proposed policies effectively. Delays or failures in policy execution can frustrate investor enthusiasm. The sustainability of market gains can be influenced by external factors such as global economic trends, geopolitical tensions, and international trade. If subsequent news or economic data do not meet expectations, initial optimism can be replaced by pessimism or caution.
By and large, the South African financial markets’ exuberant reaction was short-lived and can, therefore, be viewed as irrational. In less than a month, it had fizzled out, except for the bond market, which has continued to be buoyant as foreign investors rebalanced their portfolios to take advantage of better South African bond yields compared to those in similar emerging economies. Why? After digestion, markets realized that their expectations were not based on a growing economy. In other words, expectations were not grounded in strong underlying economic fundamentals. The GNU comprising business-friendly parties gave hope that public-private partnership arrangements would take root given the success of Operation Vulindlela. However, it is increasingly being realized that Operation Vulindlela is more of an ad hoc fire-fighting strategy focusing on the energy and logistics sectors rather than a broad-based economic reform programme. Furthermore, markets could have realized that the Cabinet of the GNU was very bloated, akin to the biblical Tower of Babel in the Genesis book, leading to likely gridlock in policymaking.
The IMF has maintained its growth forecast for South Africa, projecting the economy to grow by 0.9 percent this year and 1.2 percent next year, with a medium-term growth average of 1.4 percent. This unchanged forecast highlights the economic challenges facing the country. While the IMF has not specifically commented on the outcome of South Africa’s recent general election, officials have underscored the importance of addressing these challenges.
In early June, the IMF reiterated that South Africa’s economy continues to face significant hurdles. It emphasized the need for an ambitious structural reform programme to remove bottlenecks to growth. Key areas of focus include improving the efficiency of state-owned enterprises, enhancing the regulatory environment, and fostering a more competitive business climate. These reforms are crucial to unlocking the country’s economic potential and achieving sustainable growth.
Furthermore, the IMF stressed the importance of fiscal consolidation to manage and reduce public debt. Achieving these goals will be vital for restoring investor confidence and maintaining economic stability in the long term. The jury is still out on whether the GNU will be able to address these challenges effectively.
