Investors should be very worried about South Africa: risk expert

Investors braced for further upheaval in South Africa’s financial markets in the wake of elections that produced no outright winner, with the outcome of coalition talks remaining highly uncertain.

Rand volatility over the next month jumped Monday, briefly touching September highs before paring the gain. The rand fell for a fourth day, slipping 0.4% to 18.8739 per dollar as of 09h19 in Johannesburg.

The yield on benchmark debt climbed four basis points to 12.26%. The main stock index, on the other hand, opened higher, snapping four days of losses.

The African National Congress fell short of a parliamentary majority for the first time since it took power three decades ago, as its supporters voiced their anger about endemic poverty, unemployment and crime by boycotting the polls or backing its rivals.

It won 40.2% of the votes cast on May 29, results released by late Sunday showed.

The centrist Democratic Alliance garnered 21.8% support, former President Jacob Zuma’s new uMkhonto weSizwe Party, or MKP, 14.6% and the leftist Economic Freedom Fighters 9.5%.

The latter parties both favour increased state spending and the nationalization of mines and the central bank, and the prospects of them joining the government and demanding populist policy changes are weighing on South Africa’s currency and debt.

“Investors should be very worried because South Africa is at a fork in the road,” said Anne Frühauf, the managing director of risk adviser Teneo. “Right now, almost any coalition outcome is possible.”

The rand has slumped 2.9% against the dollar since voting began on May 29 as the extent of the ANC’s losses became apparent. The cost of insuring the nation’s debt has risen by about 19 basis points in that time to 242.3 basis points. 

A coalition with the Democratic Alliance would be the most market-positive, “but getting there won’t be easy and will undoubtedly exert pressure on ANC cohesion,” said Mark Bohlund, senior credit research analyst at REDD Intelligence.

“I think the uncertainty will continue to weigh on the rand, with a record breach of 20 per US dollar a distinct possibility,” he said.

“The weaker rand is likely to trigger some repatriation of overseas funds in the near term. But the expectations of more constrained policy making going forward will increase the incentives for South African investors.” 

While the leaders of the main parties met over the weekend to chart a way forward, they’ve yet to begin negotiating with each other in earnest, and it will likely take several days before any agreement is struck.

The National Assembly must meet to elect a president within 14 days of the declaration of the election results, although the law provides for an extension if no candidate can be agreed.

All the main parties have said they are open to a deal, although Zuma’s MKP has made any partnership with the ANC contingent on it ousting President Cyril Ramaphosa — a condition ANC Secretary-General Fikile Mbalula said it will never accept. 

While Ramaphosa’s allies favour a coalition with the DA, that option will encounter major opposition within the ANC’s ranks, according to people with knowledge of the situation who asked not to be identified because the discussions are private.

“While opposition parties like the DA, MK and EFF will push hard to secure a deal, equally important will be the ANC’s internal dynamics,” Frühauf said. “This could be a big internal fight.” 

Even if a power-sharing accord can be agreed to, there’s no guarantee it will hold if deals struck at the municipal level in South Africa are anything to go by.

Power has changed hands in several of the main cities that are ruled by multiple parties as allegiances have shifted, and the instability has caused the delivery of water, refuse removal and other services to grind to a near-halt. 

Zuma’s allegation that the vote count was marred by inconsistencies and his party’s warning that it may insist on a recount is another concern.

While the electoral commission denies that there were material discrepancies, a contested outcome doesn’t bode well for stability — particularly in the eastern KwaZulu-Natal province, where the MKP won almost half the vote.

Zuma served for almost nine scandal-marred years as president before the ANC forced him to step down to stem a loss of electoral support.

His arrest for refusing to testify before a graft inquiry sparked the worst rioting and looting the country has seen since the end of apartheid, claiming the lives of 354 people.

Read: 2024 South Africa Election: Final national and provincial results and seat allocations