(Bloomberg) -- Investors in South Africa had positioned for an election outcome where the ruling African National Congress could comfortably govern in coalition with a smaller party. But projections hinting at a significant erosion in ANC support have rattled those expectations and unleashed a flood of uncertainty. 

The rand plummeted after a model developed by a state research agency showed that the ANC looks set to lose its parliamentary majority for the first time since it came to power at the end of apartheid three decades ago.

The currency fell as much as 2.1% to trade at 18.7763 per dollar, while the yield on local-currency bonds maturing in 2035 rose 3 basis points to 12.06%.

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The ANC is on course to win about 42% of the votes cast Wednesday, according to projections from the Council for Scientific and Industrial Research, which are based on an extrapolation of early tallies released by the South African electoral commission. That compares with 57.5% in 2019. 

South African markets had rallied in May on expectations that the next government would be headed by the ANC with a market-friendly coalition partner, signaling policy continuity.

“There was little, if any, risk premium as we went into the elections,” said Adriaan du Toit, director of emerging-market economic research at AllianceBernstein. “So, an outcome in line with these initial estimates would certainly put a brake on bullish bets.”

Much would, however, depend on the shape of potential coalitions, Du Toit said.

“The range of political and policy outcomes remains wide, so we might be in limbo for a while.”

The rand’s implied volatility and bets for rand weakness over the next week against the dollar are trading at the highest level in a year after reaching pandemic-era highs.

South Africa’s main stock index fell as much as 2.3%, the most since November. That means the country’s stocks have nearly wiped out year-to-date gains, compared with a 3.4% advance in 2024 for MSCI Inc.’s emerging-market benchmark.

“Before the vote, investors certainly looked at the South African election with a glass-half-full appraisal,” said Robert Hoodless, co-head of FX & Macro Analysis at InTouch Capital Markets. “Now, volatility in rates and FX might persist if coalition talks are needed — which is likely — and are troublesome.”

South Africa’s ANC Loses Some Ground In Early Vote Tally

With 37% of election stations tallied, the opposition Democratic Alliance had 26.6% of the votes, while the populist Economic Freedom Fighters had 9.1%. uMkhonto weSizwe, or MKP, a new party headed by the country’s scandal-tainted former president, Jacob Zuma, had 9.4%. The ANC was at 42.3%, according to the latest verified results from the country’s electoral commission.

Opinion polls before the vote indicated that the ANC risked losing its majority and would have to enlist the support of one or more rivals to continue governing Africa’s most industrialized economy. 

Coalition Watch

There is an eclectic mix of parties for potential coalition negotiations, including the DA, led by John Steenhuisen, who promised two million new jobs. The EFF, under Julius Malema, has advocated increased corporate taxes and state custodianship of all land. The Inkatha Freedom Party was also seen as a likely coalition partner for the ANC, potentially in exchange for the premiership of KwaZulu-Natal province.

The MKP has drawn support from Zuma, who remains influential in KwaZulu-Natal.

“I think markets could get very nervous if coalition negotiations point to potential populist shifts,” said Du Toit.

--With assistance from Khuleko Siwele and Zijia Song.

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