South Africa is back – and you can thank Cyril: analyst

While developed market counterparts may have focused on the messages from China, Trump and Macron or perhaps even a new-found emphasis on the politics of inclusion and equality, for most South Africans, it was Cyril Ramaphosa that stole the show at last week’s World Economic Forum in Davos, Switzerland, says Shalin Bhagwan, head of fixed income at Ashburton Investments.

“The first opportunity to witness an (almost) unfettered and newly-elected president of the ANC, Cyril Ramaphosa, engage global business leaders on the world stage must surely be a clear sign of the positive things to come for South Africa in 2018, and beyond.

“If we could distil Ramaphosa’s key message to leaders like Christine Lagarde of the IMF or famed CNN-reporter Christian Amanpour, it would be this: South Africa is back, possibly from the brink, but from here on count on us to get stronger, better, faster,” said Bhagwan.

Ramaphosa said in an interview with Bloomberg television last week that the authorities are speeding up investigations to fight corruption, calling it a mammoth task, adding that government currently can’t afford to build new nuclear power reactors.

“We have to look at where the economy is – we have excess power and we have no money to go for a major nuclear plant building,” Ramaphosa told reporters at the World Economic Forum. “We have said the nuclear process will be looked at in the broad context of affordability.”

Bhagwan said that stronger governance through a resolute focus on stamping out corruption as well as stronger relations between government and business, accountability to the people of South Africa and certainty of government regulatory policy, all coalesces the central message: “South Africa is back and open for business”.

The rand traded stronger than 12 per dollar on Wednesday last week for the first time since May 2015, extending a rally sparked by Ramaphosa’s election as leader of the ruling ANC, and supported by global risk-on sentiment and the greenback’s retreat.

“Three months ago we were staring down the barrel of total junk status,” said Warrick Butler, the head of emerging-market spot trading at Standard Bank Group in Johannesburg last week. “Today the mood has rotated 180 degrees.”

Zaakirah Ismail, a fixed income strategist at Standard Bank said in a note on Monday that the rand cracked R12.00 against the dollar last week partly due to the weaker dollar. This week, the dollar will be tested as the Fed meets and US non-farm payrolls data for January is due, Ismail said.

“The rand also gained due to the positive interventions at Eskom, as well as the late December rand appreciation in response to credible political progress after the ANC conference. The currency is now below our Q1:18 range of 12.00-12.20 to the dollar. We believe that the rand is now entering overvalued territory, and it might even temporarily strengthen further in the near term.

“We forecast modest depreciation in the medium term to R12.50/$ by year-end, premised on a retreat in commodity prices. If not, the currency could, instead, trend sideways,” Ismail said.

Shortly before midday on Monday, the rand lost ground against all the major currencies, but remained under the R12.00 threshold against the greenback.

• Dollar/Rand: R11.94 (-0.84%)
• Pound/Rand: R16.87 (-0.76%)
• Euro/Rand: R14.85 (-0.84%)

Bhagwan cautioned however that South Africa is not an island, and if Ramaphosa was in Davos to garner international support for the ‘new’ South Africa, some of those doors to international investment may be tightly shut.

“It would appear to be the former if Donald Trump’s tweets are to be taken at face value; the leader of the world’s largest economy seems to be shutting shop with a banner that reads ‘America First’? Or, maybe not?

“Some would say, a reconciliatory Trump was quick to point out that America’s economy, thanks to him, was booming and that even according to the IMF, his tax cuts will likely supercharge the American economy – even if that boost is a transient one. And a booming America is great for the global economy with both China and India growing in excess of 6%.

“Even China with its Belt and Road initiative, a global, $1 trillion initative designed to bolster infrastructure investment across more than 60 countries, should play nicely into South Africa’s quest to re-ignite its economy following years of sub-par economic growth and a failure to capitalise on the last commodity boom.

“So, despite the unwinding of QE in the developed world and the prospect of higher interest rates, the developed world remains in a low yielding environment,” the analyst said.

In their search for yield, developed market investors with favourable global tail winds from the US and China, continue to eye emerging markets. “South Africa is lining up to make sure that this time it does not miss out. What better place to start than a rejuvenated political leadership credibly engaging world business on the global stage at Davos,” Bhagwan said.

Bloomberg reported last week that Ramaphosa’s path to take over as head of state from the scandal-ridden president Jacob Zuma, has fueled optimism that South Africa may even avert further credit-rating downgrades as the new leadership takes steps to root out corruption and stimulate the ailing economy.

Moody’s Investors Service is now less likely to lower the nation’s credit rating when it reviews its assessment in March, according to UBS Group AG. This month, the cost of insuring South Africa’s dollar debt against default for five years dropped to the lowest level since 2013, when the nation still had investment-grade ratings from three major companies.

S&P Global Ratings and Fitch Ratings cut the country’s debt to junk in 2017 after the removal of Pravin Gordhan as finance minister in March. Moody’s put the nation on review for a downgrade in November. A reduction of the local-currency bond rating to junk would trigger an exclusion of South Africa’s rand debt from Citigroup Inc.’s World Government Bond Index, sparking a selloff by investors tracking the gauge.

“Lackluster growth, high unemployment and a deteriorating fiscal balance sheet require urgent reforms,” UBS strategists including Jonas David, who see the rand holding around 12 per dollar over the next year, wrote in a Jan. 22 note.

“The leadership has a window of opportunity to implement changes ahead of the 2019 general elections. Recent developments lower the probability of another downgrade.”

Reporting with Bloomberg

Read: This is the ‘real’ value of the rand against the dollar