GNU partners divided over foreign policy

28 October 2024 – This week, we ask: what are the implications of GNU divisions over foreign policy? We also look at the latest inflation numbers, preview the impact of EU carbon import tariffs, and assess the results of the Mozambican election.

GNU partners divided over foreign policy

Foreign policy differences between the two largest parties in the Government of National Unity (GNU), the African National Congress (ANC) and the Democratic Alliance (DA), were thrown into stark relief last week. President Cyril Ramaphosa’s statement at the BRICS Summit in Kazan, Russia, and DA leader John Steenhuisen’s statement on Wednesday highlighted the two parties’ diametrically opposed positions regarding South Africa’s relationship with Russia. Such points of dispute raise tensions within the GNU but are unlikely to cause a break-up at this stage.

Mr Ramaphosa’s statement reflected a fulsome embrace of Russia: “We continue to see Russia as a valued ally, as a valued friend who supported us right from the beginning, from the days of our struggle against apartheid, right through to now.” Mr Steenhuisen’s statement struck a different note: “We cannot and will not agree that South Africa should consider an authoritarian regime, which is currently violating international law by waging an imperialist war of aggression against a sovereign state, as an ally.”

How the GNU partners manage their foreign policy differences will determine whether the country can make use of the economic opportunities offered by the global environment. The medium-term outlook is one of increased geopolitical tensions, disruptions and rapidly shifting trade and investment flows. Developed economies such as the US and the EU, as well as the high-growth economy of China, are facing a difficult next few years. This means that investors will be on the lookout for emerging markets with greater upside potential. This is an opportunity South Africa should leverage.

On 1 December, South Africa assumes the G20 presidency for a year. It should use the public prominence the role gives it to its advantage. It can also benefit from new trade agreements and investment initiatives with BRICS countries and other developing markets. India and Indonesia, for example, offer large upside potential.

However, South Africa’s ability to make use of these opportunities will be undermined if it talks a non-aligned game but fails to act accordingly. In the 21 October Risk Alert we detailed the latest example of this, with South Africa demanding that Taiwan remove its liaison office from Pretoria, a move the DA opposes. More recently, the international relations minister, Ronald Lamola, said last week that he hoped to table a memorandum to the cabinet on cutting diplomatic ties with Israel before the end of the year. Such decisions increase the risk that South Africa will not be seen as non-aligned, jeopardising important trade relations as well as stability within the GNU.

Relief for consumers set to continue

Consumer inflation continues to drop, hitting its lowest point since March 2021 with a 3.8% print in September, down from 4.4% in August. The South African Reserve Bank (SARB) is mandated to keep inflation broadly in the 3%-6% range and aims to keep it close to the midpoint of 4.5%. With inflation now seemingly well anchored in the target range and on a downward trend, the SARB has room to opt for another rate cut at the next meeting of its Monetary Policy Committee in November, likely of 25 basis points. Both lower inflation and lower interest rates are good news for businesses and consumers.

The state’s finances will come under the spotlight on Wednesday afternoon when the finance minister, Enoch Godongwana, delivers his Medium-Term Budget Policy Statement (MTBPS). A lower interest-rate environment will soften debt-service costs for the government and provide the minister with an opportunity to stabilise the debt curve – if he can withstand clamorous demands for higher spending from civil servants and ministerial departments. Continued fiscal restraint from the Treasury, as expressed in a measured mini-budget, will be a positive mark on the GNU scoresheet.

Navigating carbon taxes

The European Union (EU), which represents 20% of South Africa’s total trade and is South Africa’s largest trading partner, is introducing a Carbon Border Adjustment Mechanism (CBAM) with effect from January 2026. The CBAM will impose tariffs on selected imported goods based on the greenhouse gases emitted during their production and forms part of the EU’s efforts to reduce global carbon emissions. Initially the tariffs will be applied to certain cement, iron and steel, aluminium, fertiliser, electricity and hydrogen products, but the list of products is expected to be expanded to include other manufactured products.

The CBAM tariffs will over time make many South African products more expensive and therefore less competitive on the European market. This disadvantage is likely to be sustained because coal-fuelled electricity will continue to be the largest component in South Africa’s energy mix for some time. European manufacturers have already had to incorporate higher energy costs because of the renewables transition and CBAM will help prevent their overseas rivals from leveraging their lower energy costs as a competitive advantage.

As the CBAM will likely be ramped up rather than being scaled back, it represents a risk to South African manufacturers, who appear not to be adequately prepared. According to research by BMA Analysts, for example, only about 20% of the original equipment manufacturers surveyed are ready to meet CBAM reporting requirements. In the longer term, this could mean that South Africa’s trade with countries that do not impose carbon tariffs, such as China, India and Russia, will increase at the expense of trade with the EU.

Carbon import taxes like the CBAM could become a point of contention between the developed economies and the developing BRICS economies more broadly. India’s finance minister, Nirmala Sitharaman, described the CBAM as an arbitrary “trade barrier” that would hinder the ability of developing economies to transition away from fossil fuels by making the change harder to fund. In its 2023-2024 performance plan, South Africa’s international relations department wrote: “The introduction of the EU’s Carbon Border Adjustment Mechanism (CBAM) in the near future may negatively impact on South Africa and other developing countries by transferring the climate burden to the developing world.” Expect to see further tensions on this matter in the coming years, with developing nations pushing back against being made to carry the climate burden, even at the risk of disrupting existing trading relationships.

Frelimo steals an election, again

Mozambique’s latest elections took place on 9 October, although the National Electoral Commission (CNE) only released the results on the evening of 24 October. The CNE declared Daniel Chapo from the Frelimo party the winner. He walked away with 70.7% of the vote, followed by Podemos with 20.4%, Renamo with 5.8%, and the Mozambique Democratic Movement with 2.2%.

However, the elections are disputed. There have been widespread allegations of electoral fraud and rigging. Independent journalists and election observers have corroborated these allegations, claiming that voters from opposition districts were blocked from registering, ballot counts were falsified, ballot boxes were stuffed, and election results at polling station and district level underwent “unjustified alteration”, as a statement by an EU observer mission delicately put it.

Frelimo will celebrate 50 years of uninterrupted power in Mozambique next year. Against a backdrop of high unemployment, pervasive poverty and a severe food shortage, it has maintained its power through violence, corruption and by manipulating elections. The most recent example is the murder on 19 October of Elvino Dias, lawyer of independent candidate Venâncio Mondlane, who was busy preparing a case to contest the election outcome, alongside Paulo Guambe, a Podemos parliamentary candidate. Mr Mondlane rejected the election outcome.

Mozambique is an important supplier of natural gas and electricity to South Africa and many Mozambicans come to South Africa seeking a better life. In 2022 Mozambicans were the second-largest migrant group after Zimbabweans, with one in every five migrants being Mozambican, according to Statistics South Africa. In both these countries, poor governance, authoritarianism and corruption contribute to creating a bad geographical neighbourhood for South Africa, impacting its investment attractiveness and growth chances.