South Africa’s ruling coalition risks unravelling after a dispute between its main members over proposed tax increases deepened, pummelling the rand.

Tensions within the alliance were already running high because of disagreements over a series of contentious laws and exploded after the fiscal framework, which underpins the budget and incorporates a proposal to raise the value-added tax rate, was approved by the National Assembly late Wednesday.

The Democratic Alliance (DA), the second-biggest party in the so-called government of national unity, rejected the move as unprocedural, vowed to challenge it in court and called a meeting of its top leadership to discuss its future participation in President Cyril Ramaphosa’s administration.

“We are considering options after yesterday,” Democratic Alliance leader John Steenhuisen said by text message on Thursday. “There are several meetings internally that need to take place and we will meet as a party to discuss the scenarios and make an announcement in due course.”

The party is readying its exit from the government, Johannesburg-based news website TimesLive reported, citing people it didn’t identify.

Rand Slumps

The political uncertainty has unnerved investors and weighed on the rand. The currency weakened 2.3% on Wednesday — its biggest single-day drop since August 2023 — and traded 0.2% lower at 18.92 per dollar by 8:14 am in Johannesburg.

“The unprecedented budget impasse has shaken confidence in South Africa’s fiscal stability and put the GNU coalition on thin ice,” said Jervin Naidoo, a political analyst at Oxford Economics. “Growing pains were to be expected, but the way things have played out with the budget erodes the policy predictability many expected under the GNU.”

Ramaphosa formed a coalition after his party, the African National Congress (ANC), lost its parliamentary majority in last year’s elections. The marriage has been an uneasy one, with the ANC favouring a bigger role for the state in the economy and the DA pushing for more private sector involvement and changes to health, education and land-expropriation laws.

The ANC is prepared to work with all parties and won’t force the DA out of the government, said Gwede Mantashe, the ANC’s chairperson.

“The ANC can’t be in government without the DA and the ANC hopefully knows that,” Helen Zille, chairperson of the DA’s Federal Council, said on Newzroom Afrika on Thursday. “In coalitions worldwide you have to make compromises. The DA is prepared to make compromises and we have made compromises and the ANC don’t make any compromises.”

Should the DA go into opposition, the coalition would lose it parliamentary majority and the ANC would need to enlist the support of other rivals to retain power. While that could potentially open the door to the the leftist Economic Freedom Fighters or former President Jacob Zuma’s uMkhonto weSizwe Party, both have also voiced their opposition to VAT hikes.

The outcome of Wednesday’s vote in parliament leaves the DA with a dilemma, said Amaka Anku, Africa analyst at Eurasia Group.

“If the party remains in government, it will look silly after voting against the budget,” she said in a research note. “Yet DA financial backers want the party to stay in government and influence the implementation of key policies such as the Expropriation Act. These backers are aware that there may not be another opportunity for the DA to participate in government if it walks away.”