Postcards from South Africa

Uncertainty abounds in South Africa at the moment. The main source of uncertainty is the selection of the new African National Congress (ANC) leader. On December 16-20, more than 5,000 ANC delegates will elect the new president who, most likely, will become the country’s next president after the general elections in the second quarter of 2019. The ANC will also elect the additional top five leaders of the ANC, and other party officials.

But the race between Cyril Ramaphosa (current Vice President) and Ms. Nkosazana Dlamini-Zuma (former head of the African Union, supported by current President, Jacob Zuma), the top two contenders, remains very close. Some results from branch votes suggest both candidates are running neck in neck, with Mr. Ramaphosa allegedly having slight and narrowing lead. And due to the nature of the election – the ANC members will vote in a slate of candidates, not the president alone – the dynamics of the vote and coalition building could bring a range of outcomes, beyond the binary choice between Ramaphosa and Dlamini-Zuma. For example, pro-reform Mr. Ramaphosa could co-opt people from among those currently supporting Ms. Dlamini-Zuma, while she herself could also attract reformists to her slate to secure victory.

Not only is the leadership battle between the reformers and status quo candidates highly contested; the very vote itself raises the risk of the ANC splitting in case neither of the candidates wins with a decisive majority. To avoid that, the ANC may opt for a third, unity candidate who could hold the party together and reduce the risk of an unprecedented electoral loss in 2019 (the ANC has governed South Africa and most of the local governments since the early 1990s).

This complicates the outlook for the policy agenda and urgently needed reforms even further, increasing the range of potential scenarios for the rand, bonds, and South African equities. But, in general, we think that the rand will benefit from a Ramaphosa win; a stronger rand and stable inflation, combined with potential sentiment boost would then also benefit local bonds and equities. But even then, the rally may be short lived. Ramaphosa would have to lead the ANC and propose new policies with Jacob Zuma still in power. The economy could still benefit from better sentiment, but we would have to wait until 2019 for reforms. A win for Ms. Dlamini-Zuma, meanwhile, could be negative for the market. But if she co-opted reformists to her slate, sentiment towards her and the rand could improve. 

Adding to the uncertainty is the lack of clear election agendas by the main candidates. Generally, Mr. Ramaphosa would try to rebuild business sentiment and maintain a good relationship with the unions by revising or abandoning the controversial mining charter and, in general, policies that threaten expropriation or nationalisation. Ms. Dlamini Zuma would likely support free education until university level to address a shortage of skills in the country.

This clouds the outlook for sovereign ratings and the inclusion of South African local currency bonds in major bond indices. Just recently, Moody’s Investors Service put the rating on review, and decided to wait with the final decision until after the ANC Congress and the February budget update. But the deteriorating fiscal outlook led the S&P Global Ratings to downgrade local debt to sub-investment grade, making local bonds ineligible for at least one bond index popular with investors. While this could lead to forced selling, local bonds have been losing value since October, and the market actually recovered after the decision. But as the Moody's decision looms, the bond market will come under pressure again.

One thing remains certain, though. Without urgent reforms, especially to the state-owned enterprise sector, education, and improvement in business sentiment and capex, South Africa could continue to struggle with low growth and may not capitalise on its demographic dividend. But even modest reform, addressing the most binding constraints to growth and investments, could boost the country’s prospects, and with that the rand. December 20 remains the day to watch.