JOHANNESBURG - In recent years investors have proved that, whatever the economic soundness of a particular nation might be, political stability remains a crucial factor when it comes to sentiment and therefore capital flows to that country.
Consider, if you will, the effects of Nenegate at home, Brexit in the UK and Europe, and the presidency of Donald Trump in the US – and elsewhere. (Indeed, one particularly famous incident saw the dollar’s value plunge immediately after Trump tweeted to complain about its strength.)
What’s happening at home?
President Cyril Ramaphosa announced his new Cabinet late on 29 May 2019, one week after being elected by Parliament as SA’s fifth democratic president.
Within minutes of his announcement, the South African Rand had strengthened 0.5% to R14.6527/$, after three weeks of considerable post-election ups followed by a dramatic down.
The latter alarming depreciation was attributed to the perceived indecisiveness of the President to announce his Cabinet and to concerns around the re-instatement of David Mabuza to Parliament.
No great electoral surprises
But there was always quite a clear directive as to what would happen with the Rand in the context of the greater election outcome: a resounding ANC victory would facilitate Ramaphoria 2.1 and a significant Rand strengthening, while a poor ANC showing and a coalition would facilitate a Rand collapse.
It was unsurprising, then, when the governing ANC’s national election victory reinforced expectations of political continuity – neither overly positive nor overly negative from an economic or sentiment point of view – and markets acted positively off the back of familiarity with the policies at play.
Indeed, market focus seemed to move rapidly towards more immediate issues: the USA-China trade war and SA’s systematic problems with unemployment and economic growth (specifically, the underlying difficulties faced by Ramaphosa before the election, which have already been priced in).
The re-setting of the Rand
Bianca Botes, Corporate Treasury Manager at Peregrine Treasury, warned in mid-May that, even if there were a brief Ramaphoria rally (which there was), the Rand was likely to succumb to structural pressures post the election and reset to the R14.50 to R14.80 band. She was spot-on.
The current band (R14.6737/$ at the time of writing) is more in line with fair value based on economic fundamentals.
South Africa’s new Cabinet
Investors were calling for a new Cabinet, free of “the taint of scandal” and “Zuma apologists”. Taken as a whole, the new Cabinet, in which the most important positions have been filled with candidates who are perceived by analysts as credible and market-friendly, does reflect Ramaphosa’s instinct for high-calibre people – with some concessions to political realities.
By focusing on continuity, however, Ramaphosa has re-selected some of those who have delivered sub-standard growth for almost a decade.
Still, he did reduce the number of ministers from 36 to 28 to promote “greater coherence, better co-ordination and improve efficiency” towards “a capable, efficient and ethical government”, and several ministries were merged.
The President also said that he would sign performance agreements with all ministers and deputy ministers: “Their performance – individually and collectively – will be closely monitored against specific outcomes. Where implementation is unsatisfactory, action will be taken.”
Big challenges remain
Concerns remain around Eskom, with many opining that the ANC simply does not have the ability to turn that particular ship around and that Eskom will prove to be a landmark test of Ramaphosa's resolve on public finances.
If rolling blackouts continue, economic growth will remain sluggish in 2019. At the same time, unemployment will remain high for the next 12 to 18 months.
SA lawmakers face a tough road ahead when it comes to righting our country’s finances and restoring market confidence in state institutions, both of which are prerequisites for us to retain the last remaining Moody’s 'investment grade' credit rating (which is up for review in November).
On the up side
What is cheering is that our country appears to be at the point of its greatest-ever transparency in terms of corruption, issues surrounding state-owned enterprises, and the individuals involved in both. Furthermore, for the first time in SA's political history, half of the Cabinet ministers are women and a significant number of young people has been included in the new executive.
But the key focus for SA moving forward is sentiment; likely to be driven by two elements: (1) the economic data, and (2) government and its policies.
Greg Morris is the Chief Executive Officer of Sebata Holdings. Greg joined the group in 2000 and was appointed CEO in January 2011. Responsible for the day-to-day operations, management and corporate finance transactions of the Group, Greg holds a Bachelor of Accounting Honours Degree and is a qualified Chartered Accountant.
The views and expressions are not necessarily that of Independent Media.