How does the possibility of a coalition government impact long-term investment expectations?
By Marcus Rautenbach, Principal Investment Consultant
There is speculation that South Africa may be governed by a coalition government at some point in the near future. We consider the potential economic developments that may unfold in such an environment. As we do not comment on political developments, we shall not remark on the likelihood, possible partners, or timing of any possible coalitions in the future.
We categorise the potential outcomes of the South African general elections as follows:
A) A single party majority government;
B) A single party minority government;
C) A strong coalition dominated by a large coalition partner forming a majority government;
D) A weak coalition consisting of multiple smaller parties that collectively form a majority government; and
E) A chaotic coalition with multiple smaller parties that collectively form a minority government.
After a general election, the National Assembly is required to constitute a government by electing a president and other officials. The President then acts as the executive authority and Parliament as the legislative authority. If the National Assembly, by a majority vote, passes a motion of no confidence in the President, the President, the Cabinet and any Deputy Ministers must resign.
A single party majority government, and a strong coalition government dominated by a large partner who forms a majority government (a. and c. above), would provide a stable government that could implement its election manifestos through executive action and supporting legislation.
A weak coalition consisting of multiple parties in a majority government (d. above) could provide a stable government for as long as the coalition holds. It is unlikely that the election manifesto of any single party would be implemented, and a programme of principles and objectives negotiated upfront by the coalition partners would direct executive action and supporting legislation.
A single party minority (b. above) could govern with the support of other political parties that irregularly support government on some issues but not others. However, a single party minority government could face defeat on almost any issue at any time and the President could be removed by a majority vote on a motion of no confidence. This does not provide for a stable environment.
A chaotic coalition consisting of multiple smaller parties that form a minority government (e. above) would yield the most unstable type of government, as there would be very little certainty about the direction of executive action and supporting legislation. The likelihood of a motion of no confidence being carried in the National Assembly reduces the government’s ability to implement any meaningful policies.
A succession of weak governments may well result in a period of policy impasse in which South Africa may struggle to deal with some economic challenges. The process of change could lead to a period of turmoil. Should this be the case, the exchange rate of the rand could come under pressure repeatedly.
The question then is: How do investors protect the value of their savings against policy uncertainty and potential volatility?
Firstly, the impact of coalition governments and change, if it occurs, may not necessarily be negative for financial markets and South African investors. Even when operating under very average economic conditions where South Africa’s long-term economic trend growth is at 1%, financial markets perform better than the overall economy.
Secondly, the raised limit of offshore exposure for South African retirement funds provides members with alternatives. As retirement funds can invest up to 45% of total exposure offshore, the offshore exposure should be used smartly to diversify risk and improve returns when necessary.
South Africa could experience major changes in the coming years and some investment managers will position their investment portfolios better than other investment managers to deal with these changes. The future is uncertain, and we believe the allocation to local and global is a dynamic process that needs to consider a number of factors and especially valuations. Because of relative valuations, many retirement funds presently maintain an overweight exposure to domestic assets at the expense of their offshore allocation, but this may change if the landscape and valuations change.
Should the South African economy stumble as a result of uncertain coalition governments, retirement fund trustees should confer with their investment consultants and asset managers on steps to ensure security and continued growth of their members’ savings.
The answer to the question as to what practical steps can be taken to protect a portfolio against the potentially unfavourable impact of an unstable government and/or possible policy impasses, is: diversify, diversify and then diversify some more.
Retirement funds should take care to ensure that both their default investment strategies and member investment choice alternatives are suitably positioned to ensure that when change occurs, their members aren’t left behind.
Information for this article sourced from: Constitution of the Republic of South Africa, Act 108 of 1996
A bird’s eye view of Parliament’s legislative process
Parliament consists of two houses, i.e. the National Assembly and the National Council of Provinces. The National Assembly consists of 400 members elected in terms of a proportional representation system of closed lists compiled by political parties contesting general elections. Bills are passed by majority vote, while entrenched matters (e.g. constitutional changes) are passed by either a two-thirds majority or a 75% majority.
The National Council of Provinces consists of nine delegations, one from each province. Each provincial delegation consists of ten delegates – a provincial premier (or, if the Premier is not available, any member of the provincial legislature designated by the Premier), six permanent delegates that reflect the proportional representation of the individual provincial legislatures and three further special delegates that may be deployed to the National Council of Provinces by each of the provinces depending on the subject matter considered by the National Council of Provinces. Certain bills (e.g. constitutional changes or matters that affect provinces) are required to be passed by at least six provinces with each provincial premier voting for the province. Other bills are voted on by each of the individual delegates and passed by majority vote.
A maximum of ten part-time representatives designated by organised local government to represent the different categories of municipalities, may participate when necessary in the proceedings of the National Council of Provinces, but may not vote.
Either the National Assembly or the National Council of Provinces may initiate legislation, but both houses are required to pass bills before these can be sent to the President for enactment.
South Africa’s economic policy is set by the executive authority (the Presidency) and relevant legislation to implement policy is drafted, considered and approved by the legislative authority (Parliament).
To enact policies, the National Assembly drafts and considers bills. These bills are passed by ordinary majority and the bills are then required to be passed in the National Council of Provinces by ordinary majority. Bills devised to change Chapter One (Founding Provisions) of the Constitution of the Republic of South Africa require a 75% majority in the National Assembly and the support of six of the nine provinces in the National Council of Provinces. Bills devised to change Chapter Two (Bill of Rights) of the Constitution of the Republic of South Africa require a two-thirds majority in the National Assembly and the support of six of the nine provinces in the National Council of Provinces. Certain other matters (e.g. the removal of the head of a Chapter Nine institution) also require to be passed by a two-thirds majority in the National Assembly.
The conclusion is that for a minority or coalition government to govern effectively, a workable solution is required in both the National Assembly and the National Council of Provinces. Should the National Assembly pass an ordinary bill but the National Council of Provinces rejects it, the bill is referred back to the National Assembly for amendment or reconsideration. If the bill is amended, it returns to the National Council of Provinces. If the bill is again passed unchanged by the National Assembly, it is forwarded to the President for enactment. If a bill affecting the provinces is passed by the National Assembly but rejected by the National Council of Provinces, it is referred to a Mediation Committee consisting of nine members of the National Assembly (proportional) and nine delegates of the National Council of Provinces (one from each province).
Meaningful change of direction on major policy issues is possible only if the Presidency, the National Assembly and the National Council of Provinces are all aligned on policy changes.