By now, we are all suffering from election indigestion. Even so, it is worth highlighting some of the key take-aways from what was a relatively incident-free and apathetic event, given the sharp decline in voter turnout, from 73.5% to 66.0%.
Many analysts have dubbed the results a “Goldilocks” outcome – at 57.5%, the ANC’s victory was strong enough to give President Ramaphosa a clear mandate, but weak enough to lessen the complacency that usually besets a liberation party. It is a matter of perspective. The ANC’s share is sharply down on the 2014 national election (62.2%), but an improvement on the 2016 local government elections (53.9%). Importantly, the ANC managed to hold on to the Gauteng Province, albeit by a razor-thin margin. If this had not been the case, then there would have been a significant risk that the ANC would have had to make a deal with the EFF at the national level to secure a coalition in the province. The financial markets and private businesses would most likely have seen this as a negative development – an implicit shift towards populism.
Yet there is growing polarisation amongst the electorate. Granted, this is not nearly as stark as developments in the US and Europe over the last five years, but it is still a sign that the ANC is steadily losing its grip on power and that the DA has probably peaked. The EFF has gained at the expense of the ANC and the FF+ at a cost to the DA. At least we can look forward to dynamic parliamentary debates as GOOD, ATM, and ALJAMA also join the fray.
Restarting reforms
The focus has shifted to reinvigorating the reform agenda. Expectations vary. Some analysts and investors assume a sharply accelerated pace of implementation, whereas others are more realistic in looking for incrementalism, as long as it is in the right direction. We side with the view that Ramaprogress will be slow, but positive, and caution investors not to expect too much too soon. Even the low-hanging fruit of reforming the VISA regime and auctioning spectrum have proven difficult tasks.
The next litmus test for President Ramaphosa will be his announcement of the new Cabinet (potentially as early as 27 May). Predictions of a notable reduction in the size of cabinet (from 34 ministers to 25) are already widespread.
This is quite easy to achieve, at least on paper. For example, Higher Education could merge with Science and Technology to form a single Higher Education and R&D department. Communications, Public Service and Administration, and Planning, Monitoring and Evaluation could combine into a government admin/HR/internal service department still within the Presidency. The Department of Minerals and the Department of Energy could revert to the Department of Minerals and Energy of old, while the functions of the Department of Women could easily fall under a merged Labour and Social Development Ministry. Finally, The DTI, Economic Development, and Small Business Development could consolidate into a single Economic Development department.
In practice, these proposals are a very tall order. Jobs and patronage are at stake. However, the market is expecting something dramatic and streamlined.
It is not only about the size of the Cabinet but also about the quality. The ANC Parliamentary list received much media attention in the lead up to 8 May and remains somewhat tainted. Hence, there is a risk that the Cabinet may not be as corruption-free and technocratic as hoped, but that it is rather a compromise stemming from ANC NEC deliberations.
In addition to a more effective and capable state – at least at a national level – the rebuilding of the NPA, Hawks, State Security and SARS will continue. So too will the Commission of Inquiry into State Capture, even if the prospect for prosecutions remains elusive. Most recently, the President has announced the establishment of the Policy and Research Services unit to monitor and evaluate economic policy and implementation.
With regard to SOE reform, the bulk of the attention will still be on stabilising Eskom. A load-shedding free winter would be a positive signal that Eskom’s nine-point plan is being implemented. Cost containment might now be a bit easier with the elections done and dusted, but a full unbundling will have to come after the restructuring of the electricity sector and remains a major undertaking given the influence of trade unions.
Hence, Eskom endures as a critical risk to the fiscus, with the October MTBPS the next marker for the rating agencies. A crucial objective of the new administration should be to bolster the fiscal position by reducing deficits and stabilising the debt ratio. This can no longer rely on tax policy adjustments but would need to come from restraint and cutting wasteful and irregular expenditure across government.
In the interim, we need much faster growth, not only to generate tax revenue, but also to facilitate reforms. Deep structural reforms are often costly to the economy in the short term, but beneficial to long-term growth. With SA managing to grow at only 1.1% on average over the last five years, the J-curve of reform will be tough to stomach.
And so we come to the three bears
1. SA growth: GDP very likely contracted in 1Q19, with our tracker pointing to a 1.5% q/q seasonally adjusted and annualised decline. The unemployment rate increased to 27.6% in the first quarter as the number of formal sector jobs shrank. The expanded definition of unemployment sits at 38.0% and youth unemployment at an alarming 40.7%.
The consensus forecast for full-year growth has steadily dwindled from a Ramaphoria-peak of 2.0% to 1.4%; depressed business confidence persists amid policy uncertainty. With a more polarised Parliament, it will be difficult to reach consensus on the wording to the amendment of Section 25 of the constitution to include expropriation without compensation.
Even though Moody’s has pragmatic expectations on what President Ramaphosa can and will do during 2H19, the growth hurdle of 2018 (0.8%) may not be easily cleared, resulting in a further decline in per capita GDP and mounting risks to SA’s investment grade credit rating.
2. Global growth: Trade wars have re-escalated with Trump increasing the tariff on $200bn worth of imports from China from 10% to 25%. There is also a rising probability (as long as the S&P500 holds up) that he will implement tariffs on the remaining $300bn of imports from China.
The hit to US growth from the current the tariff increase should be contained to -0.1ppt on most analyst estimates. A more muted impact is ascribed to the fact that the Fed is largely done tightening, trade uncertainty has already affected confidence and investment, and firms have already started to adjust their supply chains in response to previous tariffs and attendant uncertainty. The anticipated impact on China’s GDP is larger, at -0.3ppt. US inflation is projected to be slightly higher, but with core PCE undershooting the Fed’s 2% target and with tariffs being a once-off impact on CPI, the Fed is not expected to respond with tightening. If anything, a full-blown trade war – prolonged tariffs on all imports from China and imports on auto tariffs – could prompt the Fed to cut rates.
From South Africa’s perspective, the impact will be via two channels: the real effect will come mostly from slower Chinese growth and could shave 0.1ppt off SA’s GDP growth in the medium term; the financial consequence will be risk-off and portfolio outflows that could further lower growth. The theoretical cost to local GDP may not seem onerous, but if we are growing at only 1.0% global headwinds could have an outsized impact. However, this could be temporary, as lower US interest rates that result from risk-off (and potential Fed cuts) would ultimately lead to a resumption in portfolio flows into SA’s bond market, thanks to attractive yields.
3. Politics: ANC factionalism, policy paralysis, and populism could prevent the full realisation of President Ramaphosa’s New Dawn. While he has made strides in some aspects, such as board changes at SOEs and appointing new leadership to the NPA and SARS, factionalism and union influence have impeded progress in stabilising Eskom, and so far, he has little to show on land reform.
Certain factions within the ANC expect Ramaphosa to deliver on the elective conference policy resolutions of SARB nationalisation and the investigation into prescribed assets. This would be a step backwards on the reform path and could negatively affect portfolio inflows, direct investment, and financial markets.
Temper your expectations
There has been much debate about whether investors should position for a Ramaphoria 2.0. We think this time round the investment horizon is important. In the very short term, local asset prices could benefit from a “lean and clean” Cabinet announcement, but slow subsequent reforms could disappointment markets. Moreover, ongoing trade wars will partly offset the support from positive SA-specific developments, as these will most likely take shape over a longer period.
Based on the market performance since Trump’s 5 May tariff tweet, SA has slightly outperformed its peer group. We estimate that USD/ZAR should be around 2.5% weaker and bond yields around 15bp higher, while the equity market has performed on par with the EM peer group based on the MSCI indices in local currency terms. Hence, compared to Ramaphoria 1.0 in the first half of 2018, SA’s markets are not pricing in the same euphoria and so should be less vulnerable, albeit not immune, to disappointment.
