President Jacob Zuma survived a motion of no confidence this week, the latest of many attempts to unseat an administration besieged by allegations of corruption and economic mismanagement. The victory not only allows Zuma to remain in office; it also maintains the possibility that someone from his camp may succeed him as president of his party in December, and potentially the country in 2019. Investors voted with their feet, pushing down the rand right after the motion’s defeat.
We at CIO have done the same by downgrading South Africa to least preferred in our emerging market equity strategy, and remaining cautious on the sovereign credit and the rand. We simply see too much uncertainty between now and December, when the ANC selects a new leader. The party is fractured, as Zuma’s narrow victory showed, and the two frontrunners have a roughly equal chance of winning, in our view. But the impact of either candidate’s triumph on South Africa’s outlook may be vastly different.
The Zuma camp may be led by Nkosazana Dlamini-Zuma, who has served as a cabinet minister in three administrations and is the former wife of the president. Should she win, we think it’s reasonable to assume the status quo in the way the country is run – public finances might worsen; the economy, which is in recession, might not recover quickly; and rating agencies might downgrade their assessment of the country’s creditworthiness.
The opposing camp may field Cyril Ramaphosa for the post. Currently, the party’s and the country’s deputy president, he contrasts with Zuma by being perceived as welcoming to structural reform. A Ramaphosa presidency may bring about fiscal consolidation and better economic growth, and spare the sovereign a credit rating downgrade.
For South African assets, we envision a binary outcome: equity, currency and bond markets would likely either react negatively if the Zuma camp wins, or positively if the opposing camp prevails.
But we don’t limit our views to these baseline scenarios. The next four months could still throw a curveball – the ANC conference might be cancelled or postponed, Zuma might step down, the party might remain deeply divided if neither camp’s candidate wins decisively, or it might split up completely. In any of these cases, the political uncertainty would be even higher – and potentially very damaging to South Africa’s economy and asset markets.
Zuma might have survived the no-confidence vote. How the country will fare in its aftermath is a whole other matter. Investors in South African assets should brace themselves for a rocky few months.
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