/ 8 May 2014

Electoral razzle-dazzle fails to frazzle market

Jacob Zuma promised voters he would consider a national minimum wage if he served a second term as the country's president.
Jacob Zuma promised voters he would consider a national minimum wage if he served a second term as the country's president.

Some expect that this year’s elections will be the most closely contested since the country’s dawn of democracy. But though many may stay glued to the polling screens as the votes are tallied, this could be more for spectator value rather than for the outcome’s effect on the local markets.

George Herman, head of South African investments at Citadel, said earlier in the week that he “truly didn’t think” the election would have an impact on local trading.

Johan Rossouw, group economist and strategist at Vunani Securities, agreed. “I think one must differentiate between short-term noise and long-term material changes

happening on the political front,” he said. “In the run-up to the elections there is a lot of short-term noise and I don’t think the markets are paying attention to that.”

Still, Sunday – the last day political parties were permitted to campaign actively before special voting began – was laced with weighty pre-election promises, some of which could make a material impact on the economy were they to be implemented. Among other things, ANC leader Jacob Zuma promised voters that he would consider a national minimum wage if he served a second term as the country’s president.

Sticking point
The issue has been a sticking point between business and labour in the country, and one that has repeatedly reared its head during Zuma’s first term. But Rossouw said all comments by politicians in the run-up to an election should be “taken with a pinch of salt”. Analysts are “more interested in the potential risk to changes in policies for the long term,” he said.

Paul Theron, the chief executive of fund management firm Vestact, said he is “really not expecting any fireworks”. In the most extreme case, there might be a modest reaction in the rand. “If the Economic Freedom Fighters [a radical leftist party headed by former ANC Youth League president Julius Malema] seem to be getting more traction than expected, there might be a modest currency sell-off,” said Theron.

“On the other hand, if the Democratic Alliance [with its more capitalist-friendly policies] does very well, then the currency may strengthen a bit. “However, it’s worth remembering that the rand trades more in line with other emerging market currencies than in response to local developments.”

Herman made the same observation: “Ninety percent of what is happening in emerging markets is caused by changing international sentiment. We are driven more by global risk appetite factors than by internal fundamentals.”

A recent indicator of that came last week with March’s shock trade deficit figures. South Africa saw a shortfall of R11.4-billion, vastly outpacing expectations of a R1.5-billion decline.

Minimal reaction
“And yet the markets barely reacted. In fact, the rand is a bit stronger!” Herman said of the fact that the rand had strengthened from R10.58 to the United States dollar on April 29 to R10.49 on May 6.

Economists are divided about the possibility of South Africa facing the risk of a rating agency credit downgrade post the elections. But most agree that, were this to take place, it would be thanks to long-term structural and fiscal weaknesses manifesting themselves in the economy.

“I think there is a realistic risk of credit downgrade but I don’t think it will be linked to whether the ANC wins or not,” said Herman.

But Chris Hart, chief strategist at Investment Solutions, had a considerably more ominous view.

The economy would likely be in “quite deep trouble” if Zuma remains at the helm for the next five years, he said. A change in leadership, he said in a recent Moneyweb report, would determine whether the economy enters a strong or a weak upward cycle towards the end of the year.