If currency markets are anything to go by, Cyril Ramaphosa has already clinched the highly contested ANC presidency.
The rand extended its gains against the US dollar on Tuesday ahead of the ANC’s crucial national elective conference in ten days.
It strengthened to R13.46/$ during Tuesday’s early trade – a level last seen on August 8 when President Jacob Zuma survived another no-confidence vote in parliament – retreating to a narrow range of R13.47/$ to R13.56/$.
At the time of writing, the local unit had firmed by more than 20 cents or 1% since December 1 trade of R13.73/$.
The rand has remained remarkably resilient in the face of an economy that is expected to grow by a paltry 0.7% in 2017, the shocking revelation by National Treasury of SA’s revenue shortfall of R50.8 billion and bruising credit downgrades to junk.
In fact, the rand has staged a recovery from breaking through the R14/$ critical level on November 24 after S&P Global joined Fitch Ratings in cutting SA’s local-currency rating to sub-investment grade.
So how do we square the rand’s gains when SA’s economic and political prospects are looking increasingly precarious? The answer might be Ramaphosa, the former trade unionist turned businessman who has also been SA’s deputy president for the last three years.
Ramaphosa, who is campaigning to succeed Zuma, has emerged, for now, as a frontrunner in the race for the ANC’s leadership.
Early numbers indicate that Ramaphosa is leading the nominations in a two-horse race that has pitted him against former Minister of Health, Foreign Affairs and Home Affairs and African Union Commission chair Nkosazana Dlamini-Zuma. According to News24, Ramaphosa has 1 861 branch nominations compared with Dlamini-Zuma’s 1 309.
Ramaphosa is considered to be more business-friendly than his rivals in the leadership race including Dlamini-Zuma, ANC Treasurer-General Zweli Mkhize, Human Settlements Minister Lindiwe Sisulu, National Assembly speaker Baleka Mbete, Minister in the Presidency Jeff Radebe and former ANC Treasurer-General Mathews Phosa.
The local currency market is already pricing in the likelihood that Ramaphosa will be at the helm of the ANC, says Wayne McCurrie, senior portfolio manager at Ashburton Investments.
“The market is clearly enjoying a Ramaphosa lead. Of course, should he win, the rand might strengthen further,” said McCurrie.
He expects the rand to strengthen to R12.50/$ upon a Ramaphosa win but a Dlamini-Zuma victory might send the local unit to R15/$. Of course, the situation depends on the final outcome of the conference.
Dawie Roodt, chief economist at Efficient Group, and George Glynos, chief economist at ETM Analytics, share a similar year-end rand forecast of between R12.50/$ to R13/$ if Ramaphosa wins.
Roodt said R14/$ would be the extreme if Dlamini-Zuma wins, making her SA’s first female president if the ANC wins the 2019 national elections.
Although Dlamini-Zuma has an extensive pedigree in government, her ANC leadership succession campaign has largely suffered from the negative association with Jacob Zuma, who she was previously married to.
Jacob Zuma has been implicated in corruption scandals and allegedly aiding his friends, the Gupta family and others, in clinching deals at state-owned enterprises (SOEs). Zuma is yet to face corruption allegations in court.
Also setting Dlamini-Zuma’s campaign back are her vague economic and public policy proposals that have the hallmarks of populist rhetoric of “radical economic transformation” and “white monopoly capital”.
“Corruption, bribery and state capture are not the true problem. The true problem is that government is not doing its jobs efficiently, enforcing laws, prosecuting wrongdoers and putting competent people at SOEs. This is costing the economy in terms of consumer and investor sentiment,” said McCurrie.
There’s a general consensus that Ramaphosa wouldn’t make drastic changes to ANC policies on growing the economy inclusively, but would fast-track the implementation of existing policies such as the long-touted National Development Plan, enabling policy certainty.
Policy certainty might even spur foreign inflows into the local bond market, which is exceptionally liquid, allowing investors to get out quickly.
Efficient Group’s Roodt reckons that the R13.55/$ (at the time of writing) is “massively undervalued” and enables foreigners to buy high yielding bonds cheaply. SA’s ten-year bonds offer a 9% yield (the interest rate that investors would receive on loans to the government) compared with the 6% to 7% offered by emerging market peers Russia, India, and Indonesia.
Roodt said the rand is roughly 50% undervalued against the US dollar using the purchasing power parity (PPP) theory, which examines the divergence in the value of currencies between countries and their “correct” level.
The Economist’s Big Mac Index is a useful tool to understand PPP and an undervalued rand but isn’t a precise gauge of currency misalignment.
For example, the average price of a Big Mac burger in the US in July 2017 was $5.30. In SA, it was $2.26 at an exchange rate of R13.27 at the time or R31.52 for a burger. So the “raw” Big Mac Index suggests that the rand was 57.3% undervalued against the US dollar using the PPP theory. The rand is the fourth most undervalued currency against the US dollar among 44 countries in the index, after Malaysia (62.2%), Egypt (66.9%) and Ukraine (68%).