WHAT IF CYRIL LOSES?
A catastrophic economic blow-out is not inevitable if the deputy president fails to win the December ANC election
Financial markets appear to be anticipating that Cyril Ramaphosa will win at the ANC’S December elective conference, as are many consumers and business people. This suggests that SA assets and confidence could take it extremely badly should he lose.
But just how bad is the fallout likely to be for the rand, equities and government bonds? And what about the effects on the real economy? Would all the country’s credit ratings likely be junked, causing a capital outflow shock and plunging the economy into a deep recession?
Surprisingly, the forecasts of some of SA’S leading economists as to what might happen if Ramaphosa loses are not as dire as one might expect. Certainly, domestic investment and confidence will be deeply shaken, but the most important variable will be the state of the global economy at the time.
The rand has remained relatively stable throughout 2017 and bond yields haven’t risen by much despite the breakdown in governance and the loss of SA’S investmentgrade rating. This is because of the flood of money entering emerging markets in search of yield.
This suggests that if the pace of global monetary policy normalisation remains sedate, allowing risk appetite to continue to favour emerging markets, and global demand continues to strengthen modestly next year, as most expect, then SA could make it through in reasonable shape even if Ramaphosa loses.
“As long as the international situation remains stable, it’s difficult to see a calamitous situation developing for SA,” says Nazmeera Moola, Investec Asset Management’s co-head of fixed income.
The economics are straightforward: as long as the rand remains moderately well supported through capital inflows, domestic inflation will remain contained and the Reserve Bank will not be forced to hike rates excessively, killing growth.
Of course, domestic demand will be weaker, but as long as government doesn’t tack left towards more populist policies in the run-up to the 2019 general election, consumer spending and fixed investment shouldn’t contract outright.
Weaker domestic demand would also cap import growth, while at the same time a weaker rand should boost exports. So as long as global demand remains firm, exports should perform well relative to imports. This would put a floor under SA’S growth rate.
Investec chief economist Annabel Bishop has modelled various scenarios.
If Ramaphosa loses to victors who are unpalatable to the markets, and the status quo in terms of economic and fiscal management prevails, Bishop expects that SA’S local currency ratings would be junked, confidence and investment would be depressed, and the country would enter a recession.
SA’S 2018 growth rate would be barely positive, but as long as the global environment remained supportive, the rand would average R16.23/U$ in 2018, the 10-year government bond yield 11% and the repo rate 8.25%.
This is a bad outcome, but not a horrific one. However, if in the same scenario the global environment turned against emerging markets and there was a sharp slowdown in global growth, the situation would be dire. Expect SA’S real GDP growth rate to then average -1.5% in 2018, the repo rate to climb to 9%, the rand to R18.80/$, and the 10-year bond yield to hit 12.25%.
But if, as Investec expects, the December conference ends in a stalemate — either through a power-sharing arrangement or the victory of a compromise candidate — and the global environment remains supportive, the fallout could be fairly benign.
In this expected case, to which Investec attaches a 35% probability, government will remain hamstrung, unable to undertake economic or governance reforms. GDP growth will be weak and SA’S public finances and the financial position of state-owned enterprises (SOES) will keep deteriorating.
But because the global environment will
What it means: SA will be okay as long as global growth, Eskom and risk appetite hold up