A cat­a­strophic eco­nomic blow-out is not in­evitable if the deputy pres­i­dent fails to win the De­cem­ber ANC elec­tion

Financial Mail - - FEATURE - Claire Bis­seker bis­sek­erc@fm.co.za

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

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