Date
23 November 2017
South Africa recently exited recession, but its outlook remains bleak, with expected GDP growth of less than 1 percent next year. Photo: www.timetravelturtle.com
South Africa recently exited recession, but its outlook remains bleak, with expected GDP growth of less than 1 percent next year. Photo: www.timetravelturtle.com

A nation at a crossroads

Come December, it will be South Africa’s turn to determine its future leadership, and in turn its economic and investment potential. The governing African National Congress (ANC) will elect a new president, and as the head of the dominant party, the winner would be poised to lead the country after its general election in 2019.

South Africa recently exited recession, but its outlook remains bleak, with expected GDP growth of less than 1 percent next year. Moreover, politics is keeping international investors at bay. President Jacob Zuma has long been in the hot seat, and the ANC conference from 16–22 December will give them a chance to assess the country’s ability to break with governance that is deemed inadequate, and take on confidence-building reforms.

Three front-runners have emerged to represent three different outcomes: the reformist Cyril Ramaphosa, the country’s deputy president and head of its strategic planning agency; the “status quo” candidate Nkosazana Dlamini-Zuma, a longtime cabinet minister and former wife of President Zuma; and the “compromise” contender Zweli Mkhize, the ANC’s treasurer-general.

Investors are looking for a leader who can rebuild South Africa’s finances and give its economy a fresh impetus. We think Ramaphosa comes closest to fitting that bill, but Mkhize may have a slight edge among the party ranks. Having emerged from the middle of the deeply divided factions his rivals represent, Mkhize might be seen as the party unifier. Those behind Dlamini- Zuma might also back him if she decides to withdraw amid her waning popularity.

At this point, the likely outcome is still too close to call, so it’s important for investors to remain open to any scenario. Should Ramaphosa win, his efforts to consolidate the fiscal deficit may be seen credible enough to keep the sovereign rating from being downgraded, so South African credit spreads could tighten initially. The equity market might rally as confidence improves and investors foresee a better macro outlook. The rand could also rise to 12.5 per US dollar in the months after the conference, unless Ramaphosa fails to live up to expectations.

Mkhize could also advance structural reforms, but expectations aren’t high, so the market reaction might not lift South African assets as much. The rand might hover around current levels of 14 per dollar, and then appreciate to 13.5 if he is given enough benefit of the doubt. But if Mkhize ends up affiliating with Zuma, uncertainty would linger as investors might assume the policy dynamics wouldn’t change.

A continuation of the status quo is most likely in a Dlamini-Zuma win. As a result, South Africa might lose its investment grade status, the equity market might suffer an immediate sell-off, and the rand could weaken past 14.5 per dollar – potentially depreciating further in 2018 given limited reform efforts.

Other scenarios are still on the table; the conference could be postponed or canceled, or a dark horse might rise to the top. For now, we think it’s best to remain on the sidelines until party voting is over. We remain neutral on South African equities and underweight credit and the currency.

– Contact us at [email protected]

RC

Regional Chief Investment Officer, Emerging Markets, UBS

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