A look at the lingering risks that threaten to derail the current rally. Do we now have a chance to get our country back on track? Or will the positive sentiment fizzle out?
As the dust settles following the 2019 general election, it’s evident that the centre has held. Together, the ANC and the DA, which roughly occupy the middle ground on the economic ‘ideology spectrum’, have the support of close to 80% of the electorate (or at least of the two thirds of voters who turned up at the polling booths).
Although support for the ANC, which leans towards relatively more state involvement in the economy, declined in comparison to the 2014 general election, it has recovered relative to the 2016 local elections. Moreover, a scenario in which the ANC would have been forced into a potentially unstable coalition in Gauteng should it not have secured a clear majority in the province, was avoided.
As a consequence, the result has been interpreted as an expression of confidence in President Cyril Ramaphosa, including his drive to stamp out the wastage of scarce resources due to graft and the economic reform agenda he outlined in his February 2019 State of the Nation Address (Sona).
Looking out for signposts
That said, market participants are acutely aware of the apparent fissures within the ANC, which may disrupt attempts at reform. Accordingly, they may reserve judgement and are likely to look out for signposts to confirm the president’s ‘mandate’, including the composition of the cabinet when it’s announced later this month.
At the forefront of the president’s mooted reforms is a bid to encourage a surge in jobs producing fixed investment spending, including foreign direct investment – supported by a programme to bolster business confidence partly by improving the ease of doing business in South Africa and addressing governance and financial management issues at key public sector enterprises.
But, in addition to policy clarity and certainty, investors need to be assured that the lights will stay on. Accordingly, Ramaphosa’s Sona alluded to a plan to split Eskom into three separate businesses – to isolate the costly and inefficient generation component of the electricity supplier, ostensibly paving the way for Eskom’s transmission business to purchase electricity from cheaper and more efficient producers, while also increasing usage of renewable energy.
The best plans are, nonetheless, likely to come to naught should South Africa not address the ever-present risk posed by its failed fiscal consolidation. The contingent liability risk lurking in the extensive guarantees issued by the government on the debt of the public sector enterprises has come home to roost, culminating in a cumulative R69 billion cash injection, if not more, by the National Treasury into Eskom over at least the next three years.
This draws attention to government spending more broadly. Even though Ramaphosa is expected to drive economic reforms, the developmental state model remains central to government’s economic planning and the policy objectives of the ANC party, including fee-free education and the proposed shift towards national health insurance, preclude a sharp reduction in spending. In any event, the Treasury appears committed to a gradual decrease in the relative size of the government’s bloated wage bill, through natural attrition and voluntary retrenchment only. This suggests more revenue-generating measures are likely to be announced, while the possibility of prescribed assets is still on the table.
Moreover, the president is not in a position to ignore party policy, including the resolutions taken at the ANC’s 2017 elective conference to pursue expropriation of property without compensation and nationalisation of the South African Reserve Bank (Sarb). The latter is in itself not overly concerning, although it’s likely to cause some volatility in asset prices, while the Treasury would need to compensate the bank’s private shareholders.
A far more serious problem would, however, emerge should nationalisation of the Sarb (if it occurs) adversely impact the independence of the bank. The bank’s mandate includes the pursuit of an appropriately low inflation target set by the Treasury, in support of long-term stability and sustainable growth. This requires the bank to act independently without fear or favour.
Hence, while it seems fair to argue that the general election of 2019 may signal an end to South Africa’s slide into economic policy uncertainty and depressed confidence, risks linger. Meanwhile, progress is unlikely to be smooth and will likely take time.
Alwyn Van Der Merwe:
As the results of the 2019 general election became apparent on Friday, the rand strengthened, government bonds traded at higher prices and shares that are largely dependent on the strength of the local economy responded positively. It was a picture very similar to the one that unfolded early in the first quarter of 2018 after the election of Cyril Ramaphosa as president of the ruling party.
For this rally to sustain itself, we now need to see ‘promises’ converting into reality. As has been argued before, the journey needs to start off well. If our president misses the first ‘navigation point’ by not assembling a cabinet that will allay sceptics’ fears that the ANC is unlikely to transform, the positive sentiment is likely to fizzle out soon. However, a good start by the president is likely to provide solid support for those who believe that South African shares are cheap and deserve a higher rating.
Arthur Kamp is an investment economist at Sanlam Investments, and Alwyn van der Merwe is a director of investments at Sanlam Private Wealth