June 10 (Reuters) - Tensions are rising between South Africa's new government and its leftist allies, and may increase further should the government shift back to more conservative economic policies as the global crisis eases.
Following are major issues for investors:
WILL LONG-TERM ECONOMIC POLICY CHANGE?
While counter-cyclical measures have seen fiscal and monetary policy loosen to deal with the global crisis, President Jacob Zuma and other African National Congress leaders stress his new government will not abandon investor-friendly policies.
These include tight control over public spending, which helped ensure a long stretch of growth after the end of apartheid in 1994.
But Zuma has also made clear that the plight of the poor must be addressed.
The ANC's trade union and South African Communist Party allies are pushing for a move away from market-friendly policies, which they say have kept millions of people in poverty.
Markets will watch for signs that the government is giving in to increasing pressure from the left. The strikes that labour federation COSATU and its member unions have threatened could further damage the economy and delay a recovery.
COSATU has membership of almost 2 million people and could bring the civil service to a standstill if government employees agree to mass action.
WHEN WILL THE ECONOMY RECOVER?
Africa's biggest economy sunk into its first recession in 17 years in the first quarter of this year, with its biggest quarterly contraction -- 6.4 percent -- since 1984.
The Treasury expects growth to turn positive again in the second half of this year, and the central bank has pointed to tentative signs of a global recovery.
The state's 787 billion rand ($98 billion) infrastructure spending programme is likely to set the economy up for a fast recovery when the upturn in global trade finally comes.
Interest rates have fallen 450 basis points since December, but at 7.5 percent and 11 percent respectively the repo rate and commercial banks' prime lending rate remain relatively high. With inflation a concern, rates are not expected to fall much further.
Private analysts and the Treasury expect economic growth to be positive in 2010, aided partly by the country hosting the Soccer World Cup.
WILL THERE BE POLITICAL PRESSURE ON THE CENTRAL BANK?
The unions are demanding action from the central bank, with a metal workers group protesting outside the Reserve Bank building during the last policy meeting to demand a big interest rate cut and for inflation targets to be scrapped. The demands are supported by COSATU.
The pressure is not expected to abate and will more than likely increase at the next meeting later in June, after central bank Governor Tito Mboweni hinted that the rate-cutting cycle may be at an end.
Mboweni himself is in the spotlight; a union official said last week that the federation would not support his contract being extended for another five-year term. The governor's second five-year term ends in August.
Although it will never say so publicly, Zuma's government may also want to see lower interest rates to help lift growth.
So inflation targets could be sacrificed in the power struggle with the unions -- but even in the absence of formal targets, the central bank would aim for low inflation anyway, Mboweni said last week.
COULD OTHER INSTITUTIONS BE COMPROMISED?
The dropping of a graft case against Zuma on a technicality drew accusations from some of his opponents that South Africa's institutions were being compromised.
Police, prosecutors and the judiciary all came in for criticism during the trial, which Zuma's supporters always said was politically motivated.
Investors may be worried by any sign that a new administration is putting in danger the independence of institutions important for investment protection, as well as for political freedoms.
WHAT ABOUT CORRUPTION?
Despite the fact that the charges against Zuma were dropped, his administration will be under particular scrutiny because of the background to his victory.
While investors expect higher levels of corruption in emerging markets, any signs of the problem getting further out of hand could deter investment on a continent where graft has often been a major constraint on growth.
For a story on the outlook for South African politics and economic policy, click [ID:nLA1020962])