Trump comes roaring back

11 November 2024 - In this week's Risk Alert we ask: What does the re-election of Donald Trump mean for South Africa? We review the latest US interest rate cut and analyse the ongoing exodus of high-ranking EFF members. Given the spat between Eskom and the City of Johannesburg, we ask: will Johannesburg experience a dark Christmas? We close with a look at the collapse of Germany’s coalition government.

Trump comes roaring back

Donald Trump has been reelected as president of the United States (US) in a sweeping victory. He is the first Republican since George W. Bush in 2004 to win the popular vote, along with the necessary number of Electoral College votes. His Republican party has also won control over the Senate and very likely the House of Representatives, too. At the time of writing, the Republicans required five more seats for a majority in the House, where 218 seats are needed for a majority.

The scale of Mr Trump’s win gives him a strong mandate from the voters. If the Republicans win control of Congress, he will be able to implement his agenda with relatively little impediment. Expectations are high that Mr Trump’s policies will be business-friendly and supportive of economic growth in the US. However, the precise contours of the second Trump administration are unclear; typically, much that gets floated during an election campaign does not get implemented.

For example, on the campaign trail, Mr Trump announced his intention to introduce 20% import tariffs across the board on all goods brought into the US and a 100% import tariff on goods from Mexico, the largest trading partner of the US While tariffs are the domain of Congress in theory, the legislature has ceded much of its power on this issue to the president over the decades.

Tariffs of this scale would prove disruptive to the global economy and would trigger a huge number of retaliatory tariffs across other major markets, with a noticeable impact on global trade flows. Whether these tariffs and other more radical proposals become a reality will depend on whom Mr Trump appoints to his administration. His picks will indicate his administration’s ideological direction.

Africa is unlikely to be a priority of the second Trump administration. However, pro-Israeli groups in the US will agitate for a less amicable relationship with South Africa. Unlike the Biden administration, the Trump administration will be more receptive to these voices. South Africa’s friendly relationship with Iran will also not endear it to Mr Trump, who was the target of an Iranian plot to assassinate him, according to weekend reports. However, if the US cools on South Africa and raises trade barriers generally, South Africa will have the option of compensating by strengthening its economic relationship with partners outside the US sphere of influence, primarily in Asia and Africa.

Fed stays the cutting course

The US Federal Reserve (Fed) followed up its September 50 basis-point cut in the federal funds rate with a 25-point cut last Thursday, which will support US credit expansion as well as economic demand and growth. Fed chair Jerome Powell struck a measured tone, saying: “This further recalibration of our policy stance will help maintain the strength of the economy and the labor market and will continue to enable further progress on inflation as we move toward a more neutral stance over time.” Should president-elect Donald Trump decide to replace Mr Powell, there will be significant resistance from the latter. When asked whether he would step down if asked to do so by Mr Trump, Mr Powell replied, “No,” adding that the removal or demotion of any Fed board leaders was “not permitted under the law”.

MK eats the EFF’s lunch

The Economic Freedom Fighters (EFF) continue to lose high-profile members. Last week, Advocate Dali Mpofu, the party’s national chairperson from 2014 to 2019, announced he would join former President Jacob Zuma’s uMkhonto weSizwe (MK) Party after “a lot of soul searching”. Mr Mpofu has long acted as legal representative for Mr Zuma.

In the 21 October Risk Alert, we analysed the EFF’s electoral and organisational decline. Per CRA polling conducted in early October, EFF support hovers around the 7% mark, down from the 9.5% it obtained in the May election. Declining popular support combined with the departure of prominent members such as Mr Mpofu, EFF co-founder Floyd Shivambu, impeached former Public Prosecutor Busisiwe Mkhwebane, former EFF Students' Command leader Mpho Morolane, and Member of Parliament Mzwanele Manyi, reflects a mounting crisis of confidence for the EFF.

According to Mr Malema, Mr Mpofu had proposed in 2023 that the EFF, the African Transformation Movement (ATM), the United Democratic Movement (UDM) and the Pan Africanist Congress (PAC) be merged into a new movement under the leadership of Mr Zuma. The proposal was not accepted at the time, but the EFF defections represent movement towards the intended outcome – the centralisation of left-wing, ethnic-nationalist politics in MK and under Mr Zuma’s leadership.

In his resignation letter, Mr Mpofu wrote that his mission was “the planned and deliberate unification of all the progressive forces who are primarily found in the ANC, the EFF and now MK” and said he had been working on forming MK for the past almost two years. If he and Mr Zuma succeed in their mission of a radical left-wing takeover of power in South Africa, it will be deeply negative for business, economic growth and South Africa’s prospects.

Sparks fly between Eskom and the City of Johannesburg

State power utility Eskom last week told the City of Johannesburg and City Power, the municipal electricity supplier for Johannesburg, that it was preparing to cut their power over unpaid bills. Eskom maintains that the parties owe it R4.9 billion. The current account that is due at the end of November will add a further R1.4 billion. However, the City of Johannesburg and City Power dispute the liability, which they say was generated through overcharging and grossly inaccurate billing by Eskom.

Johannesburg ratepayers, many of whom have themselves been the victims of grossly inaccurate billing from the City of Johannesburg, will take some pleasure in seeing the municipality on the receiving end of the same treatment meted out to them. They will be amused by the response from the City of Johannesburg to Eskom: “Eskom’s approach of ‘pay now and resolve disputes later’ in its dealings with the City of Johannesburg can no longer go unchallenged.” This is, of course, precisely the approach the City of Johannesburg takes towards its ratepayers.

While it is unlikely that Eskom will follow through with cutting power to Johannesburg, the dispute shows that Eskom is coming under increasing financial pressure because it is not getting paid for the services it delivers. As of the end of September, the amount owed to Eskom by municipalities had risen to R90 billion. This is clearly unsustainable and presents a risk to South Africa’s power supply and growth potential.

A lesson from Germany

Last week, German Chancellor Olaf Scholz dismissed Finance Minister Christian Lindner, leading to the collapse of the ruling three-party coalition government. The dismissal came after prolonged disputes over fiscal policy and economic strategies.

The coalition, consisting of Mr Scholz’s Social Democrats (SPD), Mr Lindner’s Free Democrats (FDP), and the Greens, had been at increasing odds over how to revive Germany’s ailing economy. The position of the FDP, a classical liberal party in favour of fiscal prudence and market liberalisation, became untenable in a tripartite coalition with the two more interventionist parties.

Mr Scholz is now expected to lead a minority government with the SPD and Greens, both parties to the left of centre. He has announced plans to seek a vote of confidence in the Bundestag on 15 January 2025, which could lead to early elections by the end of March. This political upheaval comes at a critical time for Germany, as the country grapples with economic stagnation and geopolitical challenges.

The collapse of the coalition government should sound a warning to South Africa’s Government of National Unity (GNU), which has given significant rhetorical priority to economic growth but shown little substance beyond the ephemeral potential of Operation Vulindlela. Progress in addressing the challenge of how the ANC’s interventionist instincts could find common ground with the DA’s relative economic liberalism remains elusive.

The warning from the German government’s collapse is applicable in the GNU context. While rhetoric on economic growth might be enough to set the scene for collaborative multi-party governance and win over market sentiment to buy time, sooner or later, the lack of substance and tangible progress will escalate simmering ideological differences. Such differences have the potential to override any areas of agreement and collapse governing arrangements.