The Ramaphosa trade: Long on SA's fortunes, but for how long?
THE latest information from the IRR reveals that, based on our tentative calculations, Cyril Ramaphosa is currently leading the ANC presidential race, having possibly secured 2 245 branch delegates to Dlamini-Zuma's 1 064 to date*.
Ramaphosa has been touted as being more moderate and market friendly than his rival. For those who are bullish on Ramaphosa, the 'Ramaphosa trade' is therefore long on the South African Rand, but for how long?
Headline risk; the ability of news stories, such as political events, to move the market has been a prominent driver of South Africa's performance over the last two years. In the week after Nhlanhla Nene was fired as finance minister in 2015, the rand dropped nearly 9% before Pravin Gordhan was sent in to replace Des van Rooyen.
The announcement of Gordhan's appointment appreciated the Rand by 5%, from R15.88 to R15.04, and his removal shaved off 8% of the Rand in the week after the announcement of his ousting. If the merry go round of finance ministers nudged the markets, then change right at the helm of the party could precipitate a surge of activity, especially if the result comes as a surprise.
An Ipsos poll in May 2017 revealed that Ramaphosa was viewed favourably by 5.3 out of 10 eligible voters, compared to Dlamini-Zuma's approval rating of 4.6 out of 10 eligible voters. A Ramaphosa victory, at least in the short term, will be a boon for business and consumer confidence.
Arguably, there is greater pent up exuberance in a Ramaphosa victory at the elective conference in December than there was in the appointment of Gordhan. After all, a finance minister, begrudgingly appointed, and without much political capital, carries less hope than a new president of the party elected by the majority of its membership.
Not only is there pent up exuberance, but it is not fully priced in due to the narrow race the ANC election has turned out to be, meaning that the upside potential of a positive surprise can result in a December/early 2018 market rally. But the downside pressures on Ramaphosa and his new team will weigh heavily, ushering in a later but near inevitable correction on initial December gains.
A note from Investec's Annabel Bishop yesterday on the credit rating outlook suggests that the impact of a credit downgrade may be subdued compared to the impact of downgrades on other countries, due to the fact that a "significant downgrade is partially priced in for South Africa, while investors may also see higher yields as a buying opportunity."
This, coupled with the fact that investors and ratings agencies may wait until the budget speech in February 2018 to reassess South Africa's creditworthiness, means that positive sentiment from a Ramaphosa victory in December could last at least until the 2nd quarter of 2018 before scepticism sets in.
The downside of the Ramaphosa 'long ZAR' trade includes factors such as the likelihood of policy reforms being strangled by the need to compromise, and the reality that corruption has cast a long and wide shadow in the ANC, leaving few untouched, including those on Ramaphosa's slate.
On examining the economic policy offerings of the leading candidates, i.e. Ramaphosa's 'New Deal' and Dlamini-Zuma's call for an 'Economic Codesa', it's easy to observe that there is not a wide gulf separating the two. Considering the factionalism within the ruling party and the tightness of the electoral race, it would have been strategically important for neither candidate to stick their neck out too far left or right. This need to tread a path between the rhetoric of radical redistribution and economic conservatism has left the candidates sounding very much alike. It's unclear that Ramaphosa, even if he wins, will have amassed the requisite political capital internally to push through unpopular reforms.
Both candidates' plans exhibit an unwillingness to confront the expenditure side of the fiscal equation, pinning their hopes on growing their way out of the fiscal hole instead of cutting back.
Ramaphosa's New Deal proposes a growth target of 3% in 2018, but, placed in the context of South Africa's travails, it is staggeringly optimistic. In October, Treasury revised growth for 2017 downwards from 1.3% to 0.7% in line with the IMF's forecast, while the World Bank expects the South African economy to grow by 0.6%.
It's not convincing that the impact of reforms would be felt soon enough to justify such a target. The risk is that overly optimistic growth projections could result in consolidation complacency; if potential revenues generated by growth are used to support a rationale of sustaining the current expenditure trend.
Aside from reform lethargy, corruption remains a chief concern. Unwinding patronage networks is a complex and potentially dangerous task, as reflected in the continued political violence in KwaZulu-Natal. Certainly, those on the Ramaphosa slate are not untouched by corruption's long shadow.
Zweli Mkhize, who might replace Naledi Pandor as deputy president on Ramaphosa's slate, was the premiere of KwaZulu-Natal from 2009 to 2013, during which the province was riddled with corruption scandals. In 2011 the Special Investigations Unit (SIU) was investigating procurement contracts worth R1.9 billion and cases of conflict of interest involving R3.4 billion.
As late as 2017 the province was still investigating fraud and corruption cases to the tune of R7 billion, which KZN Finance MEC Belinda Scott alleged dated back to 2009. Even if Mkhize is not directly implicated in these, it shows he had a difficult time dealing with corruption in his sphere of governance control, and was not successful in stemming the looting.
In 2005, two tenders were awarded to Business Connexion while Paul Mashatile's daughter was in their employ. At the time, Mashatile was the Gauteng MEC for Finance and Economic Affairs. In 2009 the DA's Jack Bloom laid charges against him for failing to report fraud committed at the Gauteng Economic Development Agency. Mashatile is seen as the likely candidate for Treasurer-General on Ramaphosa's slate.
The concern about state capture is not only about financial flows redirected from budget priorities to fill private coffers, but also about political authority, and the fear that the political principals no longer call the shots. State capture is a misnomer that has stuck. It is, more accurately, party capture. And a large part of the battle is to wrestle that control back into the formal structures of the ANC.
Only time will tell, but essentially if the elected political leaders are not in charge, then the plans they have amount to nil, and it is the plans of their captors which will continue to determine South Africa's future.
Ramaphosa is buoyed by positive sentiment based not insignificantly on blind optimism; his slate is presently talking a very similar talk to Dlamini-Zuma, and their proximity to corruption allegations suggests a need for caution in assuming they have never walked the same walk.
For many, however, the attitude is geared towards change and a 'Zuma must fall' stance that extends to his acolytes, making the realisation of that prospect tantalising. Of the ANC presidential front runners, it is not difficult to see why betting on Ramaphosa means to be initially long on South Africa's fortunes, but it's doubtful that can last long.
* Our data on candidate support, while received from primary sources, is not official and has not been corroborated by non-partisan sources, and should therefore be taken from whence it comes.
- Gwen Ngwenya is an economist and the COO of the IRR – a think tank that promotes political and economic freedom. Views expressed are her own.