Are the Markets Anti-democratic?

The central story of the 2024 elections is how the ANC negotiated its way back into power after losing its majority for the first time. Coalition politics is a paradigm which South Africa, and its former liberation movement, now must contend with. Some have framed the decision as a dichotomy: join forces with the DA or with the EFF, each as a figurehead for a broader ideological and strategic vision for the country. The policies, rhetoric, and outlook of these two parties attract different sides of the ideological conflict that the ANC has harboured within itself for decades. It is therefore not surprising that for many, the choice felt like the party was finally choosing a direction. 

Surrounding this choice, the role of the markets in South African democracy has been heavily discussed. The term is used as the synecdoche to represent the broader interests of businesses and capital in the economy and is typically mentioned in relation to changes in JSE share prices or the value of the rand. These financial indicators have been accused of being political because of how they have reacted to specific developments in the GNU negotiations. More concerningly, it has been suggested that because of these financial market swings, politicians have been pressured to defer to a coalition that favours the markets over one that will benefit a much wider section of the population. 

What makes markets move?

Although often spoken of as a monolithic body, markets are made up of many institutional and individual investors. These actors decide where to invest their money based on the value and safety of the return. These metrics are naturally affected by political developments, particularly ones which involve the economy. Broadly, these changes in sentiments can be separated into credibility shocks or policy shocks. The former is a result of investors changing their perceptions on the ability of the government to play its role in the economy effectively. A relevant example of such a shock is the sudden replacement of finance minister Nhlanhla Nene by then President Jacob Zuma in December 2015. The appointment of Des van Rooyen did not necessarily signal any policy shifts, but he was seen as lacking the requisite policy experience and as a purely political appointment by the President. This reshuffle caused the rand to drop significantly, eventually pressuring President Zuma to replace van Rooyen with Pravin Gordhan, who at the time was seen as a more viable option. 

The other type of shock that affects financial indicators relates to policy that is perceived to directly impact the operations of businesses in an industry or across the economy. A recent case of this is the signing of the NHI bill by President Ramaphosa in May this year. The law aims to create a government-funded health insurance system which would allow access to private healthcare for people who could not ordinarily afford it. This would partly be funded by reallocating the tax credits currently given to medical aid providers. The policy was therefore perceived as detrimental to the sector and thus caused noticeable drops in the share prices of JSE-listed health insurers.

Should we care?

Although most South Africans are not direct owners of market assets, shifts in financial indicators — or more importantly, the underlying reasons behind them — have tangible impacts on the real economy, and ultimately on the wellbeing of all South Africans. Evidence shows that changes in the perceived credibility of the government and overall business confidence in the economy strongly influence private sector gross fixed capital formation, or put simply, private sector investment in machinery, vehicles, factories, warehouses, and offices. This sets the foundation for business expansion which provides jobs and benefits supporting industries. Growth also means additional tax revenue which the government can use to facilitate greater infrastructure investment and crucially, increased spending on health, education, and social grants. 

The other impacts of financial markets relate to how South Africa interacts with the global economy. The strength of the rand for instance, affects the cost of importing fuel, consumer products, and key inputs in domestic manufacturing. This is ultimately passed on to the end consumer, such that a weaker rand typically exerts upward pressure on inflation. The cost of government borrowing through the bond market is also affected by the perceived risk of default. This is largely determined by metrics such as the debt-to-GDP ratio and current account deficit/surplus, however, as seen in the post-election bond market shifts, political changes also affect yields, without the underlying numbers changing. 

The markets aren’t everything

Although the uncomfortable reality is that changes in financial markets affect all South Africans in real ways, it is crucial that this does not limit government from enacting policies which the market opposes. As with all policy, the principal aim should be to minimise costs, both direct and implicit, while providing the greatest possible benefit to the citizens of the country. Thus, the cost of a negative market reaction can be outweighed by an overall positive impact on society. However, in understanding the differences in the nature of market changes, it is apparent that credibility shocks are an unnecessary cost that increase the difficulty of reaching meaningful policy wins for the people of South Africa. These cause reduced confidence and all its associated effects without any benefit to make up for it, while also multiplying the negative impacts of policy shocks as necessary redress measures attract suspicions of corruption. It is therefore clear that to achieve the goal of improving the lives of South Africans, a strong policy agenda must be accompanied by a government which is credible and inspires confidence. We cannot afford anything else.

Was the GNU the best move?

It is impossible to know the exact reasons the ANC decided to align with the DA as its main coalition partner. Clearly, much of the justification was more political than strictly economic, however, the agreement has been presented as a necessary compromise for stability. What is also clear is that the positive market response to the GNU and the counterfactual negative response to the potential EFF-MK coalition, are a combination of both credibility and policy shocks. The latter option, while arguably offering a policy position which is closer to what is necessary to address the unjust nature of the South African economy, comes with a significant credibility and confidence loss. This is particularly costly when strong growth is a requirement for many of the spending-heavy policy solutions the country needs. 

Of course, a far deeper philosophical conversation can be had on whether the economic impacts of investor sentiment should be so profound. There certainly is merit to the argument that these effects impede the true realisation of democracy. However, the prevailing reality is that while these conditions exist, there will often be an uncomfortable alignment between the interests of capital and those of the people. In a market economy, it cannot be progressive to oppose the markets on principle when ultimately this will leave people worse off. Especially when this means opting for a government with a significant credibility cost. Equally, there are instances where taking the hit from the markets is calculated and necessary, considering the overall effect on the prosperity of South Africans. The decision to form a Government of National Unity appears to be a manifestation of this logic, and although not ideal, will probably leave a better basis for achieving progressive aims than the alternative. The ANC will justifiably continue to lose support because of their numerous failures over the years, but at least for now, they seem to have made the wise decision.