South Africa’s New Man Has a Daunting Task Pleasing Markets

JOHANNESBURG (Capital Markets in Africa) – Investors got what they wanted in South Africa when Cyril Ramaphosa became the ruling party’s new leader, putting himself in prime position to be the nation’s next president. Now comes the difficult part.

He’ll be hard pressed to turn around a struggling economy, avoid more rating downgrades and ease political tensions, according to AllianceBernstein LP and Credit Suisse Group AG. That means the rand will struggle to sustain the 14 percent rise that has made it the world’s best-performing major currency in the past five weeks, they said.

The rand pared gains of as much as 4 percent, the most in two years, late on Monday after officials at the ANC’s conference in Johannesburg announced Ramaphosa had beaten his main rival, Nkosazana Dlamini-Zuma, by 2,440 votes to 2,261. It rose 0.2 percent to 12.722 per dollar by 4:34 p.m. Tuesday.

South Africa’s local-currency and dollar bonds extended gains. The yield on benchmark rand debt due in December 2026 dropped 25 basis points to 8.69 percent on Tuesday, extending its two-day fall to 47 basis points, the most in two years. Rates on the government’s $1.25 billion of 2026 Eurobonds declined for a seventh day to 4.58 percent, the lowest since Sept. 18. An index of banking stocks advanced to a record high.

The difficulty of Ramaphosa’s task was underscored by members of rival camps getting half the six positions on the ANC’s top governing body, including that of deputy leader, which was won by David Mabuza. He is a supporter of the incumbent head of state, Jacob Zuma, whose administration is mired in allegations of corruption and mismanagement.

 “Ramaphosa’s election, in and of itself, is positive,” said Christian Diclementi, a money manager in New York at AllianceBernstein, which oversees $535 billion of assets, including South African debt. “But the mix of new leaders at the top of the ANC is not quite what the market would have liked. Ramaphosa’s win perhaps buys South Africa time to avoid further downgrades, but it’s difficult to see how that can be avoided altogether.”

Market-Friendly Reforms
Ramaphosa, a 65-year-old businessman and trained lawyer who has become one of South Africa’s richest black citizens, endeared himself to investors with pledges to carry out market-friendly reforms and curb corruption within government. Dlamini-Zuma unnerved them with calls for “radical economic transformation” to redistribute wealth to the black majority, which they feared would lead to fiscal recklessness.

“South Africa’s chance for huge change is here and Ramaphosa is in a position now to prove to the electorate and to investors that he can bring that change,” said Simon Quijano-Evans, strategist at Legal & General Investment Management in London.

Barclays Plc upgraded its year-end forecast for the rand to 13 per dollar after Ramaphosa’s victory, from 15. The currency has rallied since falling to its weakest level in a year on Nov. 13 as investors started betting on a win for the deputy president. Its year-to-date carry return against the dollar has gone from negative to 14 percent in that period. 

But the rand could slide as much as 11 percent to 14.4 per dollar by the end of 2018, according to the median estimate of analysts in a Bloomberg survey. And the premium of options contracts to sell the rand over those to buy the currency in the next three months, known as the 25 Delta risk reversal, has jumped around 20 basis points this week to 2.97 percentage points, the highest since early November.

Ramaphosa will have to contend with Zuma remaining as the nation’s president, probably until the next elections in 2019. Days before the ANC’s leadership contest, Zuma announced that the government planned to subsidize university education for poor students — the kind of policy that has investors worried about burgeoning budget deficits at a time when tax revenue is falling short of targets.

Africa’s most industrialized economy expanded at an annual rate of 0.8 percent in the third quarter after emerging from a recession. The budget deficit is forecast to jump to 4.3 percent of gross domestic product in the current fiscal year, up from an initially projected 3.1 percent.

S&P Global Ratings and Fitch Ratings cut the country’s debt to junk this year. Investors have dumped a net 19 billion rand ($1.5 billion) of government bonds since the beginning of last month. They will probably sell billions of dollars more if Moody’s Investors Service downgrades the local-currency rating to junk, which could trigger South Africa’s exclusion from Citigroup Inc.’s World Government Bond Index.

“It is now about liberalizing again, cutting red tape, improving governance,” said Burkhard Varnholt, the deputy chief investment officer at Credit Suisse, which has $1.3 trillion of assets under management. “There is too much corruption and all of that needs to be cut, and then South Africa can become a darling of Africa investors again.”

Source: Bloomberg Business News