Investor confidence in South Africa's fragile fiscal recovery is likely to take a knock if the DA exits the government of national unity (GNU), analysts warn, amid rising political uncertainty over budget policy and coalition tension.
“The uncertainty, due to political idiosyncrasies in the global context, will amplify volatility in domestic assets over the near-term,” said Jervin Naidoo, political analyst at Oxford Economics.
“Moreover, political flip-flopping about tax proposals has created confusion, which sends the wrong message to foreign investors.”
The warning follows a narrow 194-182 National Assembly vote on Wednesday that saw finance minister Enoch Godongwana’s fiscal framework adopted, with crucial backing from smaller parties outside the GNU. The DA opposed the framework, citing disagreement over tax measures.
The National Treasury now has 30 days to find R31.5bn in alternative revenue after the VAT hike and lack of income tax bracket adjustments were rejected, but the requirement is non-binding, raising concern about how the shortfall will be closed.
Investor unease
At the core of investor unease is the lack of clarity on how decisions are made in the GNU.
“The DA’s decision not to back the budget does not mean the GNU is dead, but it highlights the fragility of the coalition,” Naidoo said.
No-one expected smooth sailing, but it [the ANC looking for support elsewhere] sets a dangerous precedent, as now the ANC can keep looking to parties outside the GNU to help pass legislation, which will weaken any leverage the DA thought it had.
— Jervin Naidoo, political analyst at Oxford Economics.
“No-one expected smooth sailing, but it [the ANC looking for support elsewhere] sets a dangerous precedent, as now the ANC can keep looking to parties outside the GNU to help pass legislation, which will weaken any leverage the DA thought it had.”
While friction was expected in South Africa's coalition era, analysts say the budget tensions — and the risk of a key partner walking away — go beyond early expectations and are already damaging investor sentiment.
“The GNU noise is much worse than what we hoped for,” said Old Mutual chief economist Johann Els.
“I’m hoping sanity will prevail and the DA will accept they cannot drive everything on their own.”
Naidoo agreed the political volatility was sending troubling signals.
“The unprecedented budget impasse has shaken confidence in South Africa's fiscal stability,” he said.
“Growing pains were to be expected, but the way things have played out with the budget erodes the policy predictability many expected under the GNU.”
According to Els, any DA departure would probably trigger volatility in the rand, albeit short-lived.
More broadly, analysts are concerned that the fiscal uncertainty — including questions about how the Treasury will raise the R31.5bn shortfall — is compounding South Africa's weak investment case.
Business Day reported on Monday policy uncertainty had reached a record high, according to the NWU Business School’s policy uncertainty index (PUI) — a signal of rising risk for recovery, investor confidence and long-term growth.
“The jury is still out on what impact the combination of further Trump tariffs and the budget decisions will have on the already highly elevated level of policy uncertainty captured by the latest PUI,” Prof Raymond Parsons, from the NWU Business School, said.
“We are still in uncharted territory in unpacking the full impact of the US protectionism and its associated unpredictability on the South African economy, as well as the remaining legal and political uncertainties surrounding the budget process,” he said.
“As the business mood and markets improved when the GNU was formed nine months ago, it is clear that a negative reaction has emerged at the prospect that the GNU in its present format may not survive.”
He says that while this may not make much difference to the basic economic direction of economic policy, “it may prevent the strategic pivot in growth policy urgently needed to get much higher job-rich growth”.
Where could the money come from?
According to Parsons, the fiscal gap has now narrowed to an amount that should easily be covered within the 30-day Treasury review without having to raise VAT, “which could be positive”.
Els said the most feasible cut would be to reverse extra spending introduced earlier this year.
“The easiest option would be to cut where they raised spending in the earlier budgets this year — most of it in terms of extra funding for nurses and teachers,” said Els, noting these allocations were not included in the October 2024 medium-term budget policy statement and were only added this year. They can reverse that,” he said.
“The last option is to tinker with the bottom line of the budget,” he cautioned, adding that if the Treasury tried to alter its headline fiscal metrics — particularly the budget deficit, primary surplus or debt-to-GDP ratio — it could alarm investors and ratings agencies and affect the rand.
He added he still believed a combination of cutting back on spending and a moderate VAT rate increase would be ideal.
Naidoo said: “If increased borrowing is not part of new funding sources over the medium-term expenditure framework period, ratings agencies and investors should not be too concerned. However, considering the mounting uncertainties about the GNU’s future and South Africa’s deteriorating fiscal outlook, negative rating actions down the line are becoming more likely.”
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