South Africa – too soon to jump for joy

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The choice of Cyril Ramaphosa as the new leader of the African National Congress (ANC) is a positive surprise, but it would appear that he is limited in what he can deliver as long as Jacob Zuma remains president in South Africa and as long as Zuma’s allies hold the levers of power.

In the absence of further upside surprises from Ramaphosa’s ‘reformist’ camp (see below for signposts, none of which are easy to deliver), disappointment will likely set in.

A couple of weeks ago, The Economist ran a South Africa doomsday cover, which was a signal to many traders that it was time to consider long positions in South African assets.[1] Recently, South Africa received what was arguably the best news in years – Cyril Ramaphosa, the market-friendly candidate for ANC leader, won the ruling party’s presidency, gaining 52% of the votes.

In the run-up to this result, the South African rand and bonds rallied to eye-watering levels – the rand is now trading at 12.3 against the US dollar (down from 14.5 in November and up by 7.0% over the five days prior to the election) and 10-year government bond yields dropped to 8.7% from almost 9.5% in November. Had Zuma’s successor Dlamini-Zuma won, a reversal would have been painful. Ramaphosa’s win has instead anchored asset prices at around their current levels for now.

Can the optimism over South Africa be sustained?

Sustaining these levels, however, is predicated on the new leadership being able to deal with the long list of economic challenges –

  • an unemployment rate peaking at a historical 27.7% high in the last quarter (exhibit 1)
  • high and sticky inflation despite economic growth virtually grinding to a halt (exhibits 2-3)
  • a lack of foreign direct investment
  • a systematic hollowing-out of institutions such as the National Treasury and the Revenue Service.

Exhibit 1: South Africa unemployment rate

South AfricaSource: Haver Analytics, South African Reserve Bank, Bureau of Economic Research, BNP Paribas Asset Management, as of 31/10/2017

Exhibit 2: South Africa real GDP growth

South AfricaSource: Haver Analytics, South African Reserve Bank, Bureau of Economic Research, BNP Paribas Asset Management, as of 05/12/2017

Exhibit 3: South Africa inflation – actual vs. expected

South AfricaNote: Expectations as of 3q2017. Source: Haver Analytics, South African Reserve Bank, Bureau of Economic Research, BNP Paribas Asset Management, as of 22/11/2017

What are the obstacles?

The even split of the top-six ANC leadership posts between Ramaphosa’s ‘reformist’ camp and Zuma’s ‘state capture’ clique muddies the view of a positive outcome. If the composition of the National Executive Committee, to be agreed soon, reflects a similar divide, the ‘reformist’ agenda could face serious obstacles.

It must also be noted that Zuma will remain president until the next election in 2019 and thus effectively represents a second centre of power, with the ability to appoint Cabinet ministers and stall policy implementation. Basically, financial markets are left with serious question marks (and rightly so, in my view) over Ramaphosa’s ability to turn things around in such difficult circumstances.

“See what they do, not what they say” would therefore be a good rule to stick to when trying to gauge Ramaphosa’s progress from here. The honeymoon is bound to be short: the clock is ticking on Moody’s 90-day negative watch review. A downgrade would result in South Africa being kicked out of the World Government Bond index.

The Treasury is scheduled to deliver a budget on 21 February. Financial markets will want to see change-focused decisions from the start of the year and in the run-up to the budget. It remains to be seen whether Ramaphosa ‘gets’ the urgency of the situation as that was not an ANC strength under Zuma’s leadership.

Actions to convince financial markets

What specifically can the ‘reformist’ camp do to convince markets they are ‘for real’? I find the following list helpful:

  • Move to remove Zuma as president of the ANC via the NEC (national executive committee) route – in January or soon after. It took nine months for the NEC to remove Thabo Mbeki after he lost power at Polokwane in 2007-2008.
  • Ramaphosa’s decision on the new head of the National Prosecution Authority (and perhaps other criminal justice units including the Hawks, South Africa’s Directorate for Priority Crime Investigation (DPCI)). The NPA has constitutional powers over decisions to prosecute corruption cases (for example, targeting Zuma et al.) and, notionally at least, it is meant to be independent.
  • ‘Low-hanging’ reforms such as refusing to consider nuclear power as an energy option and repealing the mining industry-damaging Mining Charter.
  • Changes in management/boards of state-owned enterprises such as Eskom, South African Airways, etc., which would be fiscally positive given their growing contingent liabilities.
  • Reshuffling the senior figures in the Mineral Resources, Social Development, Public Enterprises and Energy ministries – all staffed by Zuma allies.
  • Leadership change in key institutions such as the Treasury and the South African Revenue Service – ideally before the budget is delivered. This would provide a major, positive signal for reversing the ‘state of capture’ narrative.

Certainly, none of these things are easy to achieve. And the longer it takes, the less patient financial markets will likely become with South Africa.

[1] For more on the so-called Magazine Cover Indicator, go to

Marina Chernyak

Emerging Markets Economist

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