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Mr Bond is, of course, not the figure of Ian Fleming’s imagination, but is rather the global bond market that holds South Africa’s future fortunes in its hands about as much as anything else does. The market has been blasé in the run-up to last week’s local government elections, assuming that a weaker African National Congress (ANC) is a net positive for South Africa, that the Government of National Unity (GNU) as currently structured will hold, and that Cyril Ramaphosa will remain at the helm. None of those assumptions is a sure thing, especially not the first and the second.

For a number of weeks, this newspaper has argued that South Africa’s bond market* is pricing the country for a far more favourable political and economic future than current circumstances justify. The yield differential between South African and American 10-year government bonds has narrowed to levels last seen between 2004 and 2007, when South Africa’s economy was growing at approximately 5.0% annually, public debt was approaching 30.0% of GDP, and the government was running a budget surplus. Today, economic growth is barely above 1.0%, public debt is approaching 80.0% of GDP, and the political outlook is considerably more uncertain. The argument was that investors were potentially underpricing South Africa’s political risk or, alternatively, that a particularly positive political upside was largely priced into the market.

*[Quick explainer: The bond market is where investors buy and sell debt issued by governments and companies. Governments issue bonds to borrow money, promising to pay investors interest and repay the amount borrowed when the bond matures. The price of a bond reflects investors’ assessment of interest rates, inflation, and the risk that the borrower may struggle to repay its debt. When investors become more confident, demand for bonds increases, pushing their prices higher and their yields, which measure the return investors receive, lower. This makes it cheaper for governments to borrow and service their debt. When confidence weakens, investors demand higher yields to compensate for greater risk, causing bond prices to fall. It then becomes much more expensive for governments to service their debt, and less money is available for services and infrastructure development.  Bond yields therefore provide an important measure of investor confidence in a country's economic management, public finances, and, ultimately, political stability.]

Yesterday, The Common Sense published a long-form essay arguing the local government election results have presented South Africa with a choice between two very different political futures. The High Road would see the ANC and Democratic Alliance (DA) extend their cooperation in the GNU into local government, where they could together govern 158 of South Africa’s 213 municipalities. The Low Road would see the ANC form alliances with ActionSA, the uMkhonto weSizwe Party (MKP), the Economic Freedom Fighters (EFF), and the Patriotic Alliance (PA), potentially undermining the GNU and the fiscal prudence and limited economic reform programme it supports.

This editorial brings those two arguments together to examine what the High Road and Low Road outcomes could mean for South Africa’s bond market.

The central proposition is that the bond market is already priced for the High Road. Investors appear to be assuming that the weakening of the ANC will strengthen the country’s commitment to economic reform, that the GNU will survive, that fiscal prudence will be maintained, and that a pragmatic successor to President Ramaphosa will eventually emerge.

The High Road would largely validate those assumptions. An ANC and DA agreement extending from national government into municipalities would strengthen the political foundations of the GNU, improve the prospects for reform, and support confidence in South Africa’s economic outlook. Bond yields could even fall further if that political settlement translated into stronger investment, faster economic growth, and improved public finances. But much of the immediate benefit is arguably already reflected in current bond prices.

The Low Road presents a different prospect. An ANC alliance with ActionSA, the MKP, EFF, and PA at municipal level would raise questions about the ANC’s commitment to its relationship with the DA nationally. Initially, the bond market might absorb such arrangements without a dramatic reaction, particularly if the GNU remained intact.

However, the consequences could become considerably more severe if those municipal agreements triggered a broader political realignment.

Three developments would be particularly important.

The first would be the DA being forced out of the GNU, removing an important political anchor for the existing reform programme. The second would be a weakening of fiscal prudence, raising doubts about National Treasury’s ability to contain expenditure, stabilise public debt, and maintain investor confidence. The third would be the emergence of a political settlement in which the prospect of a pragmatic successor to Ramaphosa was effectively closed off, signalling that South Africa could be moving away from economic reform for years to come.

Together, these developments would undermine the assumptions supporting current bond valuations. Investors would have to demand a higher premium for holding South African government debt. Bond prices would fall, yields would rise, and the rand could come under renewed pressure. The repricing could be particularly severe if markets concluded that the deterioration was not a temporary political disruption but the beginning of a lasting change in South Africa’s economic policy direction.

The implications are therefore asymmetric. The High Road would largely confirm what the bond market already expects, while the Low Road could force investors to reassess the country’s political and fiscal outlook fundamentally.

South Africa’s local government coalition negotiations are consequently about much more than who becomes mayor of Johannesburg, Tshwane, Ekurhuleni, or Nelson Mandela Bay. They may determine whether the political assumptions underpinning South Africa’s bond market remain intact or collapse, and the danger is that investors have already priced in the benefits of a political settlement that has yet to be secured, while leaving insufficient allowance for the possibility that South Africa takes the opposite road.