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Investment views

ANC Elective Conference

21 December 2017

By Nazmeera Moola

Concrete steps from new ANC leaders required to make the recent rally sustainable

In a remarkably close election, Cyril Ramaphosa became the new President of the ANC, beating out Nkosazana Dlamini-Zuma by 179 votes on 18 December 2017. While the rand, equity markets and the local South African bond market rallied ahead of the election, the currency retraced some of its gains when the announcement was made. The rally looks to be done for now. For further positive momentum, concrete signs of progress are needed.

This will not be easy. Part of the reason for that will be the divided top 6 of the ANC. The top 6 are evenly split between three members of the Ramaphosa slate (President: Cyril Ramaphosa, Chairman: Gwede Mantashe, Treasurer-General: Paul Mashatile) and three members of the Dlamini-Zuma slate (Deputy-President: David Mabuza, Secretary General: Ace Magashule and Deputy Secretary-General: Jessie Duarte).

After a dispute over the missing 68 votes, the top 6 remained unchanged when the conference closed. Given the divisions in the top 6, the composition of the National Executive Committee (NEC) was always going to be key. The result is quite divided, though on balance, it appears more supportive of Cyril Ramaphosa. Of the 80 members of the NEC, 42 appeared on the last version of the CR17 campaign list that we have seen. While they did not appear on either list, a further two members of the NEC are clearly sympathetic to Cyril Ramaphosa. In addition, at least six members who appeared on Nkosazana Dlamini-Zuma’s list are pragmatic members of the ANC, and they are very aware of the need to stabilise both South Africa’s economy and the ANC in order to ensure the party remains in the majority in 2019. The concern is that a number of questionable members who have a poor history of policy-making and execution were re-elected to the NEC.

Given the divisions, developments going forward will be closely watched. As Cyril Ramaphosa said in his closing address: “Our people will judge this Conference not only by what we have done here over these five days, but – perhaps most importantly – by what we do next. The people of South Africa want action. They do not want words.”

Cyril Ramphosa’s speech had many good words that promoted unity of both the ANC and the country as a whole. It also delivered a strong message against corruption and ‘accounting irregularities’ in the private and public sectors and the need to improve governance of state-owned entities – notably Eskom. Unfortunately, interwoven into his speech was the evidence of the ANC’s need to find middle ground on key areas, notably land expropriation and nationalisation.

After a decade of sub-par growth and excessive government spending, South Africa needs growth to rebound to 2.5% in the coming year to stabilise the debt-to-GDP ratio in the next three years. This stable debt profile is needed for South Africa to hang onto the Moody’s investment-grade local currency rating.

The pick-up in growth is only possible if consumer confidence returns followed by business confidence. Household cash balances at commercial banks as a percentage of GDP have risen sharply in recent years, and are currently 3.5 percentage points of GDP above the long-term average. This translates into roughly R160bn extra sitting in cash or cash-like instruments that could be spent.

If consumers enter 2018 feeling more optimistic, this is certainly possible. However, any spending buoyancy will be offset by tax hikes, including limited relief for inflation and potentially VAT on fuel and property rates. Therefore, a significant boost to confidence is required to overcome this. A change in the President of South Africa in early 2018 could go a long way to generate such confidence.

Beyond the consumer, corporates need to start investing. The relationship between business and Cyril Ramaphosa is far stronger than it was between business and Jacob Zuma. This has often been used as a criticism against Ramaphosa in the ANC leadership race. However, this should turn from a hindrance to a help in 2018, as the higher degree of trust encourages business to start thinking about investing.

In order to realise a long-term boost to investment, the regulatory environment needs to improve. Policy uncertainty has been a key reason for the lack of investment. For example, mining volumes have contracted in South Africa through 2017, despite the pick-up in commodity prices. Mining companies are not investing and a good portion of the blame is the disastrous process around the Mining Charter. There are several other examples such as this.

The concern around the divided top 6 and NEC is that their ability and commitment to implement such measures will be limited. Key areas to watch in the first two months of 2018 are:

  • The release of the NEC statement on 13 January, which will expand on the key decisions of the National Conference. Specific focus is required around three main issues:
    • The expropriation of land without compensation. This was explicitly supported with a caveat: “It has also resolved that in determining the mechanisms of implementation, we must ensure that we do not undermine the economy, agricultural production and food security.” Since the biggest stumbling block to land redistribution is the inefficiency of the bureaucracy and not the acquisition of land, this is not likely to achieve much. Unfortunately, this grey area is likely to sit uneasily with rating agencies, foreign investors and farmers looking to expand production.
    • The decision to nationalise the South African Reserve Bank (SARB). While this may be largely symbolic, it has the potential to get messy and cause unnecessary noise, particularly after previous moves by the Public Protector to impinge on the SARB’s independence. Shareholders have no say in the running of the central bank and receive a minimal dividend. However, the mechanism where the value of the shares is calculated is likely to prove very contentious. Therefore, the value of the move is limited, with large potential downside.
    • The handling of President Zuma’s promise of free higher education for most students. This is unaffordable, unless severe cutbacks are implemented in other areas.
  • Developments at the National Treasury and Department of Finance. After the erosion in 2017 of their institutional capability and credibility, the shoring up of these two closely related entities is key – both for South Africa’s remaining investment-grade credit rating and the sustainability of the country’s finances in the long term.
  • The 2018 Budget on 21 February 2018. This will be a difficult juggling act – whoever is Finance Minister at that point.
  • The durability of President Zuma’s presidency. If he steps aside in early 2018, that will help lay the platform to first boost consumer confidence and then business confidence.

The election of Cyril Ramaphosa and a potentially workable NEC is undoubtedly good news for financial markets. Nonetheless, given the split in the top 6 and the composition of the NEC, concrete steps from the new leadership of the ANC are required to make the recent rally in South African assets durable through 2018.

 


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