With the ANC under the control of newly elected party president Cyril Ramaphosa and the government under the control of president Jacob Zuma, the two centres of power could disrupt policy and economic progress, leaving SA in a state of “policy paralysis”, Sanisha Packirisamy, an economist at Momentum Investments, said on Tuesday.
In her view, potential trade-offs between key policy objectives supported by the two factions could have a further negative impact on the South African economy.
At the same time, the results of the ANC elective conference could have a positive impact on consumer and business sentiment, but higher confidence levels will only be sustainable if the new leadership under Ramaphosa can rebuild trust between government and the private sector, according to Packirisamy.
To avoid “policy paralysis”, a commitment to fiscal discipline, addressing governance and financial problems at state-owned enterprises and tackling state capture would be needed. This would also sustain higher consumer and business confidence levels, in her view.
Packirisamy said an early recall of Zuma before the end of his term would likely be viewed as positive by the market. It would, however, require the consent of the so-called Zuma-faction.
The stakes also remain high in the run up to the 2019 national elections, where the ANC faces threats from opposition parties, including the Economic Freedom Fighters (EFF).
“The extent of the anticipated growth recovery in 2018 and the outlook for South Africa’s sovereign ratings will depend on whether or not officials will adopt and enact policies to enhance SA’s creditworthiness,” said Packirisamy.
“Nevertheless, even if fiscal consolidation efforts are announced in the February 2018 national budget, significant fiscal challenges remain and a higher growth path is still needed to curb SA’s debt-to-GDP profile in the medium term, suggesting the country could remain in sub-investment grade for some time.”
A “revival in sentiment” made the rand one of the best performing currencies among emerging market peers over the past three months, she explained.
Investors responded positively to the election of Ramaphosa as new ANC president. The currency was further boosted by improving commodity prices and a weaker dollar.
The market has reacted positively to the ANC top leadership election results, leaving the rand nearly 11% firmer against the dollar, relative to a year ago.
The rand ended December 10.4% firmer against the dollar, 10% stronger against the pound and 8.9% stronger against the euro compared to the beginning of December. Eastern European block currencies, however, in general outperformed the rand over a 12-month period.
By mid-morning on Tuesday the local unit was trading at R12.29/$.
The SA 10-year government bond yield rallied close to 70 basis points in December 2017, according to Packirisamy. Gains were, however, tempered late in December as the market started to reflect on the likely extent and speed of SA’s economic recovery under new leadership.
Currency strength should keep inflation comfortably within the target band in upcoming months, potentially leaving room for further modest monetary policy easing in 2018, according to Packirisamy.