Animal spirits or political risk? Separating confidence channels in an emerging economy

Does confidence move an emerging-market economy through a single channel, or does it combine animal spirits with political-risk repricing? I separate these mechanisms in a small-open-economy DSGE model that uses news sentiment, economic policy uncertainty and confidence surveys to measure two latent states. The model is estimated on South African data from 2002Q1 to 2026Q1. Bayesian model comparison strongly favours treating general sentiment and political risk as distinct forces. A one-standard-deviation improvement in sentiment raises investment and real equity-price growth by about 0.77 percentage points on impact. A political-risk shock instead weakens the rand, widens the sovereign spread, depresses investment and lowers subsequent output growth. Together, the two forces explain about 42 per cent of sovereign-spread fluctuations over eight quarters, but only 0.3 per cent of output-growth variation. Supporting demand may lift optimism, but firms are unlikely to invest unless credible institutions and predictable policy also keep political-risk premia low.