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Freshfields Transactions

| 5 minutes read

South Africa’s new political landscape: a beacon of hope for business and investment?

The recent elections in South Africa are expected to increase optimism among investors, driven by the inauguration of Cyril Ramaphosa and the formation of a government of national unity between the African National Congress (ANC) and the Democratic Alliance (DA) and others. This unexpected alliance between South Africa's historic political heavyweight and a party known for its pro-business stance has sparked hope for economic rejuvenation and political stability. 

The immediate rally in the currency and stock market following the election results reflects the relief and cautious optimism of the business community. Many feared a coalition involving the uMkhonto weSizwe (MK) and Economic Freedom Fighters (EFF) parties, whose radical agendas of nationalising banks and land could have triggered market turmoil. Instead, the ANC and DA's partnership, though unanticipated until recently, is seen as a stabilising force with the potential to guide South Africa through its economic and political challenges.

A coalition of necessity

The formation of the ANC-DA coalition was not a foregone conclusion. The MK party's surprising electoral success disrupted the traditional vote patterns, forcing the ANC to seek a robust coalition partner to secure governance. The MK party, only six months old, garnered about 15 per cent of the vote, a portion that might have otherwise gone to the ANC. This shift necessitated a coalition with the DA, preventing a scenario where the ANC could govern with smaller, less stable parties.

The ANC and DA have a fraught history of coalition governance at the local level, marked by conflicts and inefficiencies. While the dynamics at the national level could differ significantly, the complexities and challenges of coalition governance remain. As a junior partner, the DA will need to navigate the risks of being overshadowed or blamed for governance or policy failures without receiving due credit for successes.

Infrastructure: a pathway to growth

One of the primary agendas of the DA is to address South Africa's crumbling infrastructure. The country's economic potential is severely hampered by inadequate infrastructure, particularly in the transportation and energy sectors. Eskom, the state electricity supplier, is infamous for its inefficiency, leading to widespread power outages that have stymied industries and eroded investor confidence. The DA's focus on infrastructure development is crucial, as efficient infrastructure is fundamental to the country's mining, manufacturing, and agricultural sectors. Without proper infrastructure, moving the needle on economic growth will be very difficult.

A significant portion of South Africa's mineral wealth remains largely untapped due to logistical challenges in transporting resources from mines to ports. Improving infrastructure could unlock significant economic value, making the country more attractive to foreign investors. The ANC, aware of these challenges, is likely to support the DA's infrastructure agenda to some extent, though achieving tangible results will require overcoming bureaucratic inertia, corruption and securing substantial funding.

Labour market reforms: a sticking point

However, the coalition faces significant challenges, particularly concerning labour market regulations. The ANC, heavily influenced by trade unions, is resistant to reforms that would make hiring and firing easier, a point of contention with the DA. These ideological differences could create friction within the coalition, affecting policy implementation. South Africa's labour market is highly regulated, which can stifle business growth and deter investment. The DA's push for more flexible labour laws will likely encounter stiff resistance from the ANC, which relies on union support and is wary of alienating a key constituency.

Geopolitical tensions and economic strategy

On the geopolitical front, the ANC's historical ties to Russia and China contrast sharply with the DA's pro-Western stance. This dichotomy could lead to internal conflicts, especially as South Africa navigates its relationships with major global powers. The ANC's emotional and historical ties to Moscow, dating back to the anti-apartheid struggle, could clash with the DA's strategic alignment with Western economic interests. The Republican Congressional Caucus in the US has previously expressed concerns over South Africa's ties with Russia, potentially jeopardising favourable trade agreements. This could strengthen the DA's position within the coalition, arguing that it would be economically unwise to maintain strong ties with Russia and China. The outcome of these ideological tensions will have significant implications for South Africa's economic strategy and its attractiveness to international investors.

Investment opportunities and risks

Despite these challenges, investment opportunities abound in the post-election landscape. Middle Eastern sovereign wealth funds, with their higher risk appetite, are particularly keen on South Africa’s natural resources and agricultural potential. Food security is a major concern in the Middle East, and South Africa's vast arable land presents an attractive investment opportunity. Furthermore, South African businesses seeking to access international capital could benefit from the newfound political stability. Freshfields' recent work with Transnet, raising $1bn on international debt markets, exemplifies the potential for large-scale investment deals.

The South African mining sector, despite its vast potential, is frequently embroiled in legal disputes and historical claims related to environmental degradation, labour practices, and community rights. Recently, several high-profile cases have highlighted the need for robust legal strategies to navigate these complex challenges. Freshfields is well-equipped to assist companies in addressing these claims. By providing comprehensive legal support, from compliance and risk management to litigation and dispute resolution, Freshfields working together with the best local firms helps ensure that companies can operate responsibly and sustainably while protecting their interests.

Corruption and state capture are still pervasive issues that could deter potential investors. Although there have been efforts to combat corruption, systemic issues persist. The new government’s ability to address these concerns will be critical in maintaining investor confidence. The international business community will be closely monitoring these developments as they consider their investment strategies.

Freshfields: navigating opportunities and risks

Freshfields, through its partnerships with local South African firms, is well-positioned to navigate these opportunities and risks. The firm's global expertise and local knowledge enable it to offer a compelling proposition to clients, particularly in complex mandates that require nuanced understanding of both international investor expectations and local market dynamics. Our partnership model with StrongerTogether firms brings a unique value to clients, combining global experience with local expertise.

Freshfields' strategy leverages its extensive international experience and deep relationships with sovereign wealth funds and other major investors. This positions the firm uniquely to facilitate significant deals and navigate the complexities of the South African market. The recent election has brought relative political stability, opening a window of opportunity for foreign investors to reconsider South Africa as a viable destination for capital investment. 

South Africa’s new political landscape, despite its challenges, presents significant opportunities for business and investment. The ANC and DA coalition has the potential to steer the country towards economic growth, provided they can navigate their ideological differences and address critical issues such as infrastructure and corruption. For investors and businesses, this period of transition could mark the beginning of a more stable and prosperous era for South Africa. Freshfields stands ready to help its clients navigate these complexities, leveraging its global expertise and local partnerships to unlock the country's economic potential.

To find out how elections around the world are affecting international investments, please see our 2024 election supercycle insights.  


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