Red berets in trouble

21 October 2024 - This week: where to next for the EFF? We preview the upcoming MTBPS and assess the global interest rate outlook. We close with a look at Sudan, and at the SA government's stance on Taiwan.

Red berets in trouble

The Marxist Economic Freedom Fighters (EFF) are in trouble. Having been relegated to the position of fourth-largest party behind a rampant uMkhonto weSizwe (MK) in the 2024 election, the EFF has since struggled to find its feet. The latest CRA polling, conducted in early October, has the EFF at 6.9% support, in line with September polling by the Social Research Foundation, which put the EFF at 6%. This is significantly and rapidly down from the 9.5% the party secured in the May election.

The drop in support comes at the same time as key party members are leaving the EFF, starting with Floyd Shivambu, the former EFF founding deputy president, in August. He was followed by prominent EFF members of parliament (MPs) including former Gupta confidant Mzwanele Manyi, impeached former Public Protector Busisiwe Mkhwebane, actor and activist Fana Mokoena, member of parliament Mmabatho Mokause, and the former leader of the EFF students command, Mpho Morolane. Most of the leavers have gone to join Jacob Zuma’s MK party.

These developments reflect a mounting crisis of confidence for the EFF, which will be holding its elective conference in December. If party leader Julius Malema and his management team do not find a way to re-establish confidence and halt the party’s crumbling, it is at risk of declining into irrelevance in short order. Its remnants will then be absorbed into other parties, mainly into MK — which is establishing itself as the representative of radical politics in South Africa — and partly into the African National Congress (ANC). The risk is that this process will lead to a strengthening of radicalism through two routes: through a larger and more effective MK, and by shifting the ANC onto a path of greater radicalism through internal influence.

What the MTBPS will tell us

South Africa’s finance minister, Enoch Godongwana, will deliver his mini budget — more formally, the Medium-Term Budget Policy Statement (MTBPS) — on 30 October. It bears close watching as it affords South Africans an opportunity to read what the fiscal priorities of the Government of National Unity (GNU) might be. A key aspect to look out for will be whether the finance ministry maintains a commitment to fiscal discipline in pursuit of debt consolidation or accedes to the clamour for more spending on categories such as higher pay for public sector employees and unaffordable projects like the National Health Insurance (NHI) and a basic income grant. A further point of interest will be whether the Treasury’s spending priorities favour ANC-run portfolios disproportionately or reflect a balance across all GNU departments, including those run by other parties.

If the MTBPS shows that the government is loosening the reins on spending, it would create a risk to currency stability and fiscal sustainability. South Africa’s fiscal space is limited because debt is already high and expensive, while growth — and the ability to raise more revenue — is low. If the MTBPS demonstrates a clear favouring of ANC-run ministries, this will lead to political instability because the other government parties will feel that they are being shortchanged, to which they will respond by becoming more oppositional to the ANC in their government work.

The interest rate outlook

Early indications are that the world is entering a period of falling interest rates. The US Federal Reserve cut its benchmark rate by 50 basis points in September and market observers such as the Fitch ratings agency expect at least one smaller cut before the end of the year. The South African Reserve Bank has also started cutting rates, beginning with a 25-point cut in the repo rate in September.

Much like consumers, governments feel that they can afford to spend more freely when rates are lower. But for developing countries such as South Africa, the space seemingly granted by somewhat lower interest rates — and correspondingly lower borrowing and debt-service costs — could be short-lived.

The International Monetary Fund (IMF) writes in its October 2024 Fiscal Monitor that it expects global public debt to exceed 93% of global GDP, or $100 trillion, by the end of this year. The ratio is expected to reach the 100% mark by 2030, up from 90% in 2019. A more highly leveraged world implies a higher risk of financial disruption and economic turmoil, a considerable danger to a small, open economy like that of South Africa. The Treasury and the GNU are therefore well advised to use the lower interest rate window for investment in resilience and growth-supporting infrastructure and policies rather than on consumption. Should they fail to do so, South Africa will remain highly vulnerable to future exogenous shocks.

Regional ripples of the war in Sudan

The ongoing, 18-month long war in Sudan has already displaced 11 million people — almost a quarter of the country’s population — into neighbouring Ethiopia, Kenya and Uganda. This widely ignored conflict is beginning to impact economic growth in neighbouring countries and the broader region. The World Bank has revised its estimate of 2024 growth in the region downwards, from 3.4% in April to 3% in its October update. Excluding Sudan, the World Bank expects the region’s economy to grow by 3.5% in 2024, with Andrew Dabalen, the bank’s chief economist for Africa, saying that the economy of Sudan had “basically completely disappeared”.

The Sudanese conflict is also adding stress to regional food security. The 11 million displaced individuals will have a destabilising effect on neighbouring countries’ food supply. Of these, the World Bank estimates that approximately 8.5 million are malnourished, while 755,000 face famine. The Sudanese conflict is also disrupting agricultural activity in the region which is already under pressure because of flash floods caused by the El Niño weather cycle. The risks for South Africa include an increase in illegal immigration as displaced people cascade through the wider region, raising the danger of social instability, as well as a drag on economic growth as regional value chains come under pressure.

South Africa’s Taiwan gaffe

Reports that the Department of International Relations and Cooperation is demanding that Taiwan remove its liaison office from Pretoria foreground South Africa’s diplomatic positioning. Although not officially confirmed, it is understood that South Africa is under pressure from the People’s Republic of China to do this.

While Taiwan lacks formal diplomatic backing from most countries, its unofficial representation carries weight. It is a robust democracy with declining public enthusiasm for incorporation into the communist mainland, a global leader in computer chip technology, and a de facto part of a US-centred alliance confronting China in the Pacific. China has pledged “reunification,” even through war, making Taiwan’s status an important international matter, with enormous geopolitical meaning for the US and its allies. This is especially so after Russia’s invasion of Ukraine, which South Africa also notably declined forthrightly to condemn.

South Africa appears to be doubling down on a pro-Chinese and implicitly anti-Western orientation. This is despite the preponderance of its inward investment originating in the Western sphere, as well as the markets such countries provide for value-added exports. ANC party documents have long evinced a dogmatically ideological approach to foreign policy, and a geopolitical worldview in which the “West” is viewed in starkly hostile terms.

Demanding the exit of Taiwan’s office holds risks of possible Taiwanese retaliation, although given the limited relationship, it is questionable how damaging this might be. It does, however, signify a visible commitment by the South African government to align with China, serving as another factor eroding relations with the geopolitical West. This creates disruption risks for some of South Africa’s most important trade and diplomatic relationships, as well as signposting a worrisome distancing from leading free and open societies.