The resignation of South African president Jacob Zuma will likely brighten the country’s reform outlook given newly sworn in president, Cyril Ramaphosa’s commitment to growth-stimulating macro policy, says UBS Wealth Management.
“Zuma’s exit may be followed by a cabinet re-shuffle, greater efforts for fiscal consolidation and further governance changes at state-owned enterprises. This should lower the probability of a rating downgrade by Moody’s in March, although the risks remain considerable,” the wealth management firm said in a note.
UBS Wealth Management’s chief investment office reiterated its overweight positions on South Africa in credit and equities.
“While credit no longer provides a valuation advantage over peers, the recent correction offers a good entry opportunity, in our view. In equities, we expect a lower risk premium to attract investors, while a brighter economic outlook and improved governance should boost corporate earnings growth.”
The management firm said it has adjusted its USD/ZAR forecast to R11.50, R11.30 and R11.00 in three, six and 12 months, respectively – from R12.00 across the board.
“We expect volatility to remain high. Ramaphosa’s leadership has a window of opportunity to reduce some of the structural headwinds that have been weighing on the rand in recent years.
“The current account deficit has narrowed over the last few years, which is positive and should limit the rand’s downside at times of less favorable global conditions. Still, South Africa remains dependent on volatile portfolio inflows and is vulnerable to related setbacks,” UBS said.
UBS Wealth Management said that the new ANC leadership, led by Ramaphosa, has improved market sentiment since the ANC election in December. The South African rand appreciated close to 15% (from R13.5 to R11.65 per US dollar).
“In our view, Ramaphosa will help to rebuild policy credibility in South Africa along with governance changes at state-owned enterprises. The announcement of the budget due on 21 February will be a crucial next signpost about the government’s willingness and ability to push the much-needed fiscal consolidation forward. Moreover, Zuma’s exit may be followed by a cabinet re-shuffle and further governance changes at state-owned enterprises.
“In combination, these changes should lower the probability of a rating downgrade by Moody’s in March, although the risks remain considerable.
“Moreover, we expect current dynamics to boost confidence in the new leadership both locally and internationally, which can have a positive impact on South African asset prices but also help to improve the country’s growth outlook,” UBS said.
It added that a strengthening currency should eventually allow the South African Reserve Bank (SARB) to cut its policy rate, “although we expect the SARB to err on the side of caution”. This, it said, should have a positive impact on the growth outlook and gradually stabilize public finances.
“Nevertheless, restoring business confidence won’t be easy. The economy remains constrained by endemic corruption, a high unemployment rate, and a rigid labor market. The ANC remains split between pro-Zuma and pro-Ramaphosa supporters and several top members of the party are facing corruption allegations.
“We believe temporary setbacks to South African asset prices look likely, especially given the pronounced rally. However, we think the ongoing push for reforms should fundamentally support the market in coming quarters,” it said.