While elections are just days away, the rand has remained relatively unresponsive to local elements ranging from politics to economic data, notes Bianca Botes, corporate treasury manager at Peregrine Treasury Solution, adding that a solid ANC win as is predicted, “would be considered a positive outcome”.
“In looking at what would be considered the optimal election, one first needs to differentiate between what would be good for market sentiment and what would be good for the nation’s sentiment.
“While the ruling African National Congress (ANC) has left a sour taste in the mouth of many South Africans, the local political landscape provides very little by way of alternative options, with the two largest opposition parties currently being the Democratic Alliance (DA and the Economic Freedom Fighters (EFF),” Botes said.
She said that while Peregrine Treasury Solutions is not advocating for people to vote for any particular party, there is a section of the electorate which suggests that a strong showing by the ANC would be the most beneficial outcome given the current political landscape.
The thinking, Botes said, goes along the lines of “the trust and sentiment vested in Cyril Ramaphosa in particular and his ability to clean up the ANC and drive policies that are pro-economic growth will benefit South Africa”.
The best-case scenario
The markets are currently suggesting that, from a global sentiment perspective, the outcome will reflect a solid win for the ANC. However, for this success to translate into benefits to the local economy, it would need to be subject to:
- Ramaphosa being on a strong footing within the ANC – he is currently reported to be on somewhat shaky ground which would impede his ability to implement economic reform.
- A coalition not being required – SA has a reputation for not managing coalition politics very well. In addition, a coalition would add to policy uncertainty and revisions to crucial policies such as the highly contested mining charter and land expropriation without compensation.
- The rapid prosecution of those implicated in State Capture, resulting in the removal of involved officials from government and cabinet.
“While we can say with almost 100% certainty that the ANC is likely to secure an absolute majority in the election, the other factors listed above are not as certain,” said Botes.
The currency analyst said that while the rand has been passive for the larger part of the election buildup, “we expect knee-jerk movements as the winning party is announced, which will largely be driven by international trade in the local unit”.
“A majority win for the ANC will likely see the rand act positively as markets are familiar with the policies at play. However, should a coalition be required to form a government, this would push the rand towards negative terrain as it would reduce Cyril Ramaphosa’s ability to drive sentiment, stability and economically conducive policies.”
Should a coalition government be required, one forged with the EFF would be seen as more negative than a coalition with the DA, due to the more balanced approach of the latter party, Peregrine Treasury Solution said.
“However, once the initial response to the election result has been absorbed by the market, we believe that market participants will quickly shift from “trading the win” to “trading sentiment”, driven by the steps taken by the ruling party post-election to clean up their house and the policies that they drive.
“Under this scenario, the rand is likely to gain some momentum to target the R13.50/$ level in the period immediately following the election. In fact, if the ANC secures a two thirds majority win, we could be in for a second Ramaphoria rally – Ramaphoria 2.1, if you like,” Botes said.
Such strength will, however, not be sustainable as the same problems will continue to exist, with the biggest risk being Eskom. Many feel that the governing party simply does not have the ability to turn the ship around, she said.
No matter what the election results return, Peregrine Treasury Solution said that the economic growth will remain sluggish throughout 2019, especially should rolling blackouts continue.
“At the same time, unemployment will remain high for at least the next 12 to 18 months, regardless of policy and governing party. Neither of these structural problems can be resolved swiftly and they will continue to plague the South African economy in the medium term.”
Botes said that even if there is a brief Ramaphoria rally, the rand is likely to succumb to the structural pressures post the election, and reset to more realistic levels in the R14.50 to R14.80 band – more in line with fair value based on economic fundamentals.
The rand traded at the following levels against the major currencies in trade on Tuesday:
- Dollar/Rand: R14.37 (0.31%)
- Pound/Rand: R18.60 (0.43%)
- Euro/Rand: R16.07 (0.32%)