South Africa Faces Economic Uncertainty Amid Political Shake-Up

South Africa's currency, stocks, and bonds experienced a significant drop as election projections suggested the African National Congress (ANC) might lose its parliamentary majority. The potential need for coalition governance is causing concerns over political stability and economic policy in the nation. Market performance has notably declined in reaction to these developments.

South Africa's currency, stocks and bonds fell on Thursday amid political uncertainty after election projections showed the African National Congress (ANC) was set to lose its parliamentary majority for the first time in 30 years. If confirmed by final results, the ANC will have to make a deal with one or more other parties to govern - a situation that could lead to political volatility and uncertainty over economic and fiscal policy in Africa's most industrialised nation.

The rand fell more than 1% against the U.S. dollar at one point and at 1530 GMT was trading at 18.5900, over 0.7% weaker than its previous close. The dollar was last down over 0.45% against a basket of major currencies, though not far off a two week high hit earlier in the week.

"We have seen underperformance of South African assets, implying that election results so far may have come as negative surprise to market expectations," said Andrew Matheny at Goldman Sachs in London. On the Johannesburg Stock Exchange, the blue-chip Top-40 index closed down 1.7% compared to a 1.46% decline across wider emerging markets, while both local and international bonds also came under pressure.

The Council for Scientific and Industrial Research projected the ANC would get 42% of the national vote, while broadcaster eNCA estimated 45%. So far, the election commission has only released results from 27.18% of polling stations. Those partial results put the ANC at 42.54% of the vote, the biggest opposition party Democratic Alliance (DA) at 25.40% and radical leftist Economic Freedom Fighters (EFF) at 8.76%.

"A tie up with the market friendly DA is likely to be seen positively by markets while coalescing with the populist MK party or Marxist EFF will likely be negative for rates, credit and the currency," said Michael Kafe, strategist at Barclays in London. Yields on the domestic 10-year benchmark spiked as high as 10.743% - levels last seen in late April - before pulling back to 10.58%, LSEG data showed. Bond yields move inversely to prices.

Among international dollar bonds, longer-dated maturities slipped nearly 1 cent in early trading to hit four week lows before retracing some of the losses. At 1544 GMT, the 2052 bond traded at 86.665 cents, Tradeweb data showed. The cost of insuring exposure to South Africa's debt rose. Five-year credit default swaps rose 3 basis points (bps) from Wednesday's close to 230 bps, the highest in a month, according to data from S&P Global Market Intelligence.