/ 9 May 2019

Ramaphosa’s reforms not certain

The South African economy is in such a ditch that the country cannot afford a new party which would take months or years to learn how to run it.
The South African economy is in such a ditch that the country cannot afford a new party which would take months or years to learn how to run it. (Fabrice Coffrini/ Getty Images)

The election results — regardless of whether or not the ruling ANC gets a solid majority from voters — are unlikely to move the needle on economic growth, analysts said as South Africans voted in the 2019 general election.

As poll numbers began rolling in, economists and observers argued that the real test for any sustained positive uptick in local markets will be whether President Cyril Ramaphosa can push through economic reforms to unlock growth, despite ongoing factional battles in the ANC. And some expect that he will struggle to achieve this.

Not least of the tasks facing a new administration is how to address the current power crisis and resolve the financial and operational issues at power utility Eskom. Eskom’s unbundling and how the government goes about fixing its woes — including whether it downsizes and makes greater space for private players — is itself an intensely politicised issue.

READ MORE: Eskom burns on through bailout

An outright win for the ANC is viewed as positive for investors and ratings agencies, with a pre-election survey from Intellidex suggesting that financial market participants peg this “mandate threshold” to be a little over the 58% mark.

READ MORE: SA’s ‘investment strike’ is a myth

As votes were tallied on Thursday, the rand steadily strengthened against the dollar, reaching R14.33 — an improvement from weaker levels at the start of the week of over R14.50 to the dollar.

The yield on benchmark government bonds also trended lower into Thursday to about 8.5%.

At the time of writing, the first predictions from the Council for Scientific and Industrial Research (CSIR) came in, putting the ANC’s share of the vote at 57.39%, the Mail & Guardian reported.

The rand experienced some volatility ahead of the ballot, driven as much by global events — notably worry over trade tensions between the United States and China — as any jitters about the election, noted Azar Jammine, chief economist at Econometrix.

While investors will be closely watching the share of the vote taken by the ANC, the growth of the Economic Freedom Fighters will be as closely watched, said Jammine. A marked increase for the Red Berets would not be welcomed as it may force the ANC towards greater populism, he said.

“Irrespective of the results, the real proof of the pudding will be what Ramaphosa does after the election,” Jammine said.

Independent political analyst Ralph Mathekga warned that the belief that a solid win for the ANC will allow Ramaphosa, who is seen as business-friendly, to institute a reform agenda is misguided.

Ramaphosa had not campaigned on a reform agenda, he said, but rather on the ANC’s manifesto, which is replete with populist policies investors do not support, such as nationalising the Reserve Bank, the expropriation of land without compensation and the possible introduction of prescribed assets.

If anything, a 60% win for the ANC would embolden Ramaphosa’s detractors within the party, argued Mathekga, especially because his detractors won significant policy concessions at the ANC elective conference at Nasrec.

“To expect that such a victory for the ANC will provide Ramaphosa with the space to abrogate on those things in the manifesto is beyond bizarre for me,” said Mathekga.

Given a split in the party between reformists and those associated with former president Jacob Zuma’s era of state capture and corruption, battles in the ANC are only likely to intensify after the election, argued Mathekga.

Regardless of how the market behaves, and whether it rallies on the results or not, Mathekga said that, after a while, reality will sink in and “we will realise problems are even more [severe] within the ANC”.

If enough people believe that a large majority for the ANC signals “a new dawn” then asset prices will reflect this, said Izak Odendaal, an investment strategist for Old Mutual Multi-Managers.

“But I don’t think we are going to see enough change to move the needle on economic growth.”

A solid win for Ramaphosa is likely to see the acceleration of his clean-up of government — such as the changes he has made at the South African Revenue Service, the National Prosecuting Authority, and various state-owned entities — and could help to lift business confidence, Odendaal added.

“But to get faster growth on a sustained basis you need broader economic policies that are more business-friendly and that is what I don’t think we are going to get,” he said.

“It’s still going to be the same ANC … with the same beliefs and constraints; the same alliances, the same [national executive committee] that is split 50-50.”

This election’s completion could, however, mark an end to the “paralysis” that has gripped businesses, consumers and investors in the South African economy in recent years, argued Odendaal.

After years of rampant corruption, the erosion of state institutions and depressed economic growth, fixed investment into the economy has stagnated.

According to the South African Reserve Bank’s most recent quarterly bulletin, the ratio of nominal fixed capital formation to GDP — an indication of levels of investment in the country — declined to 18.2% in 2018, its lowest level since 2005, said the bank, and well below 23.5% of 10 years ago. Getting past the election will hopefully prompt individuals to begin saving again and businesses to begin expanding and growing their operations, he said.

The “troubling dynamics” of intra-party issues within the ANC are the real issue facing Ramaphosa, said Iraj Abedien, the chief executive of Pan-African Investment & Research, adding that the percentage of the electoral win does not deal with these issues.

Nevertheless, he argued that an outright ANC win at the national level is the most market-friendly outcome, simply because Ramaphosa is regarded as business-friendly with a good business track record and no other party “has either the credibility or the experience to offer a better alternative”.

Furthermore the economy “is in such a deep economic ditch that the country cannot afford to have a new party which would take months or years to learn how to run the economy,” he said.

“At least, with all its sins, the ANC, and Ramaphosa in particular, are familiar with what is wrong and needs urgent and immediate attention.”

Intellidex economist Peter Attard Montalto cautioned that, even with an “okay” win for the ANC, the link between the results and the post-election reform agenda and political environment is weak. Even though he expected a “short-run bout of post-election Ramaphoria”, this should fade when the reality of low growth and the lack of reform sinkin.

Once the country has digested the results, however, the make-up of the new Cabinet — both its size and members — will be closely watched, said Mathekga.

What actions Ramaphosa takes regarding state-owned entities such as Eskom and SAA will also be key, as will what steps he takes in the longer term on issues such as the size of the public service and its growing wage bill.