Nenegate 2.0: Warning of massive blow to the rand

 ·3 Jun 2024

Old Mutual Group Chief Economist Johann Els has warned that the rand could see a sharp sell-off in the coming weeks if the African National Congress (ANC) ends up in a ‘leftist’ populist coalition.

This would mirror the events of ‘Nenegate’ in 2015, when former president Jacob Zuma unceremoniously sacked former finance minister Nhlanhla Nene late in the evening on 9 December, he said.

The firing of Nene put South Africa’s markets into a tailspin, sending the rand to a then-historical low of R16 to the dollar. The situation was widely seen as the start of Zuma’s downfall, as his actions and links to third parties outside government soon came under closer scrutiny, later dubbed state capture.

According to Els, the results of South Africa’s 2024 national elections have created a seismic shift in the political landscape, sending shockwaves throughout the country.

“For the first time since the end of apartheid, the ANC lost its majority. This dramatic change has significant implications for the country’s economic and political future, as the nation faces a period of uncertainty and potential market volatility until the political situation becomes clearer.”

Els said that the probability of a coalition or minority government remains significant, which likely suggests a continuation of current policies.

However, the possibility of a more populist coalition cannot be discounted, he said.

“Financial markets are expected to remain unsettled over the next week or two as coalition discussions progress.

“The rand may experience volatility, potentially seeing a sharp sell-off as risk premiums rise. This scenario mirrors the events of December 2015 when the former Finance Minister, Nhlanhla Nene, was replaced. A negative outcome, such as a leftist coalition, could lead to a substantial sell-off.”

Before the elections, markets had hoped that the ANC would secure enough votes to form coalitions with smaller parties and remain in the driver’s seat of government.

This was seen as hopeful mainly because it would provide policy certainty while removing some risk of progress made on the economic front being reversed or undone.

However, the final outcome was one where the governing party has no choice but to approach bigger coalition partners to form the seventh administration.

Els said that one potential post-election governing scenario could be an ANC, DA, and IFP coalition, which markets would favour due to the promise of more policy reform, stronger implementation, and a firm stance against corruption.

Another scenario could be a “Government of National Unity (GNU)” involving the ANC, DA, MK, EFF, and IFP.

“While this option offers broad buy-in, it could be seen as detrimental to policy and growth due to potential conflicts,” Els said.

The ANC could also form a minority government supported by the DA and IFP, which might maintain current policies but could be viewed by markets as less stable.

An ANC, MK, and EFF coalition would be the least favourable outcome, “unless there is a strong consensus to continue current ANC policies, which is unlikely,” Els said. In this scenario, the rand could be in big trouble.

“The uncertain political climate has already impacted financial markets, with the rand and equity indices experiencing declines. The convening of the new parliament to elect the president will be pivotal in shaping South Africa’s future political and economic direction,” he said.

According to Investec chief economist Annabel Bishop markets are also worried that the ANC might choose the EFF as its coalition partner, along with smaller parties. While this would bypass the MK, it is another ‘extreme left’ toss-up that investors are extremely negative about.

“The high level of uncertainty, as political parties now enter negotiations, has created a negative drag on the rand, although an ANC/DA, or ANC/MPC (Multi-party coalition) would be positively received by the financial markets and the rand,” she said.

The projections are clear, however: the rand would strengthen on an increased likelihood of an ANC/MPC or ANC/DA coalition or supportive relationship/structure, but weaken on an ANC/EFF or ANC/MK coalition or structure to govern South Africa.

Els said that despite the political upheaval, he cautioned investors against making hasty financial decisions in the wake of the election results.

“It is crucial to remember that South Africa has significant inherent strengths that will mitigate political risks.”

These strengths include a strong constitution with entrenched rights, an independent judiciary, including a fiercely independent Constitutional Court, a free media, strong and independent institutions such as the South African Reserve Bank (SARB), the Treasury and the South African Revenue Service (SARS), a well-regulated financial sector and deep capital markets.

Markets are expected to remain volatile and easily spooked over the next few weeks as a clearer picture emerges of where South Africa’s coalition era will land.

Read: All the big changes to National Assembly and Provincial Legislatures in South Africa

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