South Africa is at a crossroads

by Nazmeera Moola - Head of SA Investments at Investec
South Africa is at a Crossroads

A week after South Africa’s fifth democratic election and the election results reveal that the country has made the pragmatic decision. Voters have given the ANC a sufficient majority to comfortably form a government, both nationally and in the eight provinces it previously ruled.

In the run-up to the election two questions took centre stage. First, would Cyril Ramaphosa gain a big enough endorsement to implement reform?

The consensus view was that a number around 56-58% would be sufficient. The ANC achieved 57.5%, thus providing Ramaphosa with the mandate he requires. Second, would the ANC be able to hold on to Gauteng, South Africa’s economic heartland, by itself, or would it need to form a coalition with the EFF to retain control of the province?

When it became clear that the ANC would not have to cut any deals with the EFF, markets rallied strongly. In the midst of a Trump and China-driven wobble in emerging market currencies and equity markets, both the rand and domestic South African stocks strengthened.

While the short-term boost is welcome, the longer-term outlook will be determined by the choices South Africa now makes.

South Africa is at something of a crossroads. After a decade of sub-par growth, erratic policymaking and widespread private and public sector corruption, the status quo is not sustainable. If the government remains unable to make hard decisions, growth will continue to be insipid and expenditure will remain excessive. Growth at around 1% is insufficient to stabilise government debt levels.

Unfortunately, there is a growing risk that the global environment may become distinctly unhelpful. Jacob Zuma was allowed to propagate his profligate spending and rampant corruption because plentiful global liquidity in the aftermath of the global financial crisis resulted in massive foreign inflows into South Africa’s bond market.

Quantitative easing meant that for a number of years, markets have failed to do their job in South Africa. Instead of punishing South Africa for its deteriorating budgetary fundamentals, money continued to pour in, allowing the government to issue large amounts of debt. Awash with cheap money, the foreign ownership of the local bond market rose from 7% in 2008 to a peak of 48% in mid-2018.

In the late 2018 sell-off in markets, foreign ownership in South Africa declined to 38%. Fortunately, the country has a deep local savings pool that can fund the budget deficit. However, government borrowing costs have had to rise to attract sufficient funding. If global conditions turn more unfavourable, they will have to rise further, diverting an increasing share of government spending to interest payments.

For now, global conditions are neutral. By global conditions I mean the combination of the growth outlook and the liquidity outlook. Growth looks okay, although the April Chinese data was mixed. Chinese growth is key for commodity exporters like South Africa. Global liquidity received an enormous boost when the US Federal Reserve kept interest rates on hold during the first four months of the year. The central bank’s move effectively halted the sell-off in markets. However, if inflation returns as a concern, US interest rates may well start rising again.

Against an uncertain global outlook, it is key that South Africa takes all the measures it can to insulate itself by boosting confidence, investment and growth

The first post-election signpost to South Africa’s prospects will be the shape of the new Cabinet. Will it be cut down from 35 to 25 ministries? Will there be a clean-up of those ministers implicated in state corruption? Will capable people be appointed? The President is due to be sworn in on 22 May. While the timing is not entirely clear, the cabinet should be announced by then.

In late 2022, the ANC will hold its next electoral congress. That gives Cyril Ramaphosa the next three years to tackle the ails that Jacob Zuma inflicted on the country. If he doesn’t manage to get growth going in that period, the ANC will elect a more radical leadership. That will only be the start – as there is every chance that in mid-2024, the EFF will become the kingmaker.

The EFF’s current policy mix resembles those of Venezuela – emotionally seductive to the economically disempowered, but ultimately unsustainable. Such policies lead to food crises, as we have seen in Zimbabwe and Venezuela. But five more years without growth could well leave us at the point that voters are willing to give it a try.

This article was first published in Daily Maverick on 15 May 2019.

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