Markets have welcomed the outcome of South Africa’s election. But we think it’s too soon for long-term investors to crack open the Methode Cap Classique*
President Ramaphosa is neither a stranger to the need for change in South Africa nor short on ambition to effect reform and restore key institutions. So the recent election result, which secured a majority for the ANC government and launched Ramaphosa into his second term in office, bolsters the foundations for South Africa’s path to recovery.
The signs are positive but it’s still early days.
But beware over exuberance. The team Ramaphosa chooses will be critical. Will he cut down the cabinet from 35 to 25 ministries? Will there be a clean-up of those ministers implicated in state corruption? Will he appoint a capable body of staff? Ramaphosa’s moves so far give cause for optimism, but it is still early days. And team selection is only the first hurdle to securing long-term success.
Ramaphosa now has three years to bring growth back to South Africa.
The rebuilding of a country scarred by a decade of corruption and economic decline will be a long-term endeavour. A protracted era of fiscal weakening, low growth and rising unemployment leaves South Africa on very uneven ground. And ongoing economic weakness will only increase the allure of South Africa’s populist opposition party, the Economic Freedom Fighters (EFF). Not only will Ramaphosa have to tread a careful line as he tries to rebuild the economy – sweeping reforms are often painful and rarely popular – at the same time he must get growth going or face the prospect of the ANC electing a more radical leader in three years’ time.
Borrowing costs have had to rise for South Africa to attract sufficient funding.
South Africa’s current vulnerabilities aren’t all home-grown. The distortions created by the extraordinary monetary policy that followed the global financial crisis meant yield-hungry investors turned a blind eye to South Africa’s weakening fundamentals and mounting debt pile. Foreign investors now own a sizeable chunk of South Africa’s local currency bond market and since the market sell-off at the end of last year borrowing costs have had to rise to attract sufficient funding. If the global backdrop shifts in the wrong direction for South Africa, rates will have to rise further, diverting an increasing share of government spending to interest payments. 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.
Time will tell if the project to rebuild South Africa’s economy is a success.
While news of the South African election result provides a welcome contrast to headlines on Trump’s trade tariffs and is a step in the right direction, we remain cautiously positioned across our emerging market debt strategies. Ramaphosa’s second term in office cements the foundations for the long-term project of rebuilding South Africa’s economy. Time will tell if the project is a success.
Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
*Methode Cap Classique, or MCC, is South Africa’s equivalent of Champagne.