South Africa wins a fragile post-election window of economic opportunity

By Sharon Wood 14 May 2019

South African President Cyril Ramaphosa cheers during the results announcement ceremony at the Independent Electoral Commission (IEC) in Pretoria, South Africa, 11 May 2019. The results saw the African National Congress (ANC) win the general election as expected. EPA-EFE/YESHIEL PANCHIA

SA has come out of the 8 May 2019 elections on a solid footing and has even managed to withstand the financial market sell-off on the flare-up in trade tensions between the US and China late last week. Now all eyes are on whether President Cyril Ramaphosa has the mandate to push ahead with necessary policy reform, taking advantage of this invaluable window of opportunity against a still-nervy global economic backdrop.

The rand, South Africa’s investor sentiment temperature gauge, held up well in the face of renewed US-China trade tensions and unfolding local election results.

This bodes well for the country and suggests that, global trade tensions notwithstanding, President Cyril Ramaphosa has a window of opportunity to make the policy and economic headway he seems set on — and which will get South Africa out of its economic mire.

The initial signs are that the elections have provided South Africa with some grounding and that Ramophosa is gearing up to get going on the most pressing government initiatives. The results, which Sanlam Investment economist Arthur Kamp describes as holding the centre, were generally viewed as providing political continuity and, on the margin, as a positive for the country.

Also encouraging was that Ramaphosa wasted no time in moving ahead on showing his commitment to policy reform when he announced the establishment of a policy and research advisory unit within the Presidency, over the weekend. But it goes without speaking that investors will need to see actual results within, say, the next six months if South Africa is to maintain its grounding and thus resilience in the face of any global economic surprises.

Investec Asset Management head of investments Nazmeera Moola says the global backdrop for South Africa is still questionable given the ongoing uncertainty in three crucial areas. These include the global growth outlook, trade tensions and liquidity. One positive is that global liquidity conditions have eased markedly since late 2018 when central banks were widely expected to withdraw liquidity and raise rates.

Were South Africa to take advantage of this more liquid global environment and implement the necessary policy reforms, she says the country would find itself in the better part of the emerging market universe. That would provide it with much-needed economic and investor resilience given the ongoing challenges posed by the other two: A still uncertain global growth outlook and the unsettling trade tit-for-tats, which may take some time to resolve.

In his weekly economic assessment aptly titled Tariffs Trump Polls for Investors, Old Mutual Wealth economist Dave Mohr highlights how important global developments are for local investors and economic policy and, while much of the attention was on elections over the past week, “global factors ultimately matter more for investments portfolios than local”. More specifically, he notes:

Local investors tend to overstate how politics influences returns. The reality is that Washington DC matters more for policy than Pretoria, and Wall Street in New York for equity returns than Exchange Square in Sandton.”

Moola warns that the best-case scenario for South Africa is a neutral global backdrop, but adds that there are risks that it could turn negative.

Policy decisions need to be made to get growth going.”

On the establishment of the policy and research unit, she says any efforts to boost the government’s policy-making capacity are a positive, given that little attention has been paid to this since Thabo Mbeki was president.

For Kamp, the key question he wants to see the answer to is: “Did Cyril get a mandate for reform?”

His three signposts for whether this is so are evidence that government is moving ahead on Eskom’s restructuring and funding plan; the way the proposed nationalisation of the SA Reserve Bank pans out and whether its independence remains intact, and, finally, the composition of the Cabinet and whether continuity is preserved in the key Finance and Revenue Services portfolios.

Mohr says this election was a lot less “binary” than the ANC elective conference in December 2017. As such, it was the pivotal event, “where a different outcome was a real possibility with negative implications for the country’s economic and political landscape”. The question on his mind is:

Can we now look forward to significant change?”

Not necessarily, he says, because it is unlikely that the party will agree to fundamental shifts in economic policy (such as widespread privatisation or deregulation), but he does expect tweaks.

He expects most progress to be made in the functioning of government and the overhaul of state-owned enterprises. That would improve business confidence, but he believes the prospects for substantial pro-growth economic policy reforms will be limited by many of the same of factors that existed before the election.

Cleaner and more competent government will help the country’s economic performance over time, but sustained growth requires policy changes.”

Kamp agrees that if Ramaphosa’s initiatives are enough to increase confidence and investment, growth could become relatively better, but not exciting — and certainly not to the 5% or so needed to enable fiscal consolidation at least. The best we can hope for at this stage is to set this as a long-term aspiration.

However, he does believe that conditions have stacked up reasonably well; enough to provide the foundations off which the key economy-boosting policy decisions can be taken with a certain level of comfort, barring another external shock. DM


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