Article / 15 December 2017 at 11:25 GMT

What the ANC leadership contest means for South Africa and the rand

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  • Ramaphosa is more popular but the Zumas are no strangers to dirty tricks
  • A Dlamini-Zuma win would imperil South Africa's credit ratings
  • By contrast, Ramaphosa has the confidence of the international business community
  • It is a close-fought election that will end in court whoever wins
Zuma
 President Zuma wants his ex-wife to succeed him but her rival, Cyril Ramaphosa, has more popular support.
Photo: Albert H. Teich / Shutterstock.com

By Frederick Wennested-Petersen*

According to media reports from December 4, Cyril Ramaphosa, deputy president both of South Africa and the country's ruling ANC party, looks set to beat former cabinet minister Nkosazana Dlamini-Zuma to head the party at the party conference starting December 16. Ramaphosa's clear lead in the leadership contest has benefitted the national currency, the rand. However, there is still speculation that Dlamini-Zuma (president Jacob Zuma's ex-wife) could win the race thanks to "inducements" and congress delegate votes. Despite representing the people of their branch, ANC congress delegates are not bound to vote according to their branch nomination. This potentially creates a situation where Dlamini-Zuma could influence the outcome of the party nomination with underhand tactics. 

The rand is weak due to the corruption of current president Jacob Zuma, who has been implicated in a series of incidents involving such things as fraud and money laundering. The South African Supreme Court of Appeal has ruled that Zuma must face charges. The Zuma regime also has a lack of clarity as to who holds power. The substantial influence of the Guptas, an extremely wealthy expatriate Indian family, on South African politics under Zuma is worrying for South Africans and engenders a lack of confidence from the business community.

Potential election outcomes

The two major candidates in this party election present two possible scenarios. Dlamini-Zuma represents a continuation of the current Zuma regime, while Ramaphosa represents a step towards change for South Africa. This fork in the road leaves the question, what will this election mean for the rand and South African sovereign credit ratings now and into the future?

Nkosazana Dlamini-Zuma is viewed as the heir to Jacob Zuma, representing a continuation of the same regime. Her campaign rhetoric calling for radical economic transformation (RET), is similar to the campaign promises of current president Jacob Zuma for progress via racial and gender quotas. For example, Dlamini-Zuma is calling for universal free tertiary education in South Africa, a proposal president Zuma has recently pushed for. This project, set to start in the 2018 academic year, would inflict a ZAR40 billion cost on an already depleted government budget. Campaign promises like these are pushing Dlamini-Zuma further on the back foot in terms of turning around business confidence.

The difference between Cyril Ramaphosa and Dlamini-Zuma is not as distinct as to where one can say it is a scenario of death and destruction for the rand and South African sovereign credit ratings under Dlamini-Zuma and a full recovery under Ramaphosa. However, Ramaphosa possesses the confidence of businesses domestically and abroad. With calls for a clampdown on corruption, and his stance on the parliamentary enquiry into Eksom, dog-whistling the involvement of the Gupta brothers into state capture, Ramaphosa has garnered the support of the South African people and business world that there will be a turnaround in South Africa. Given his opponent, the economic recovery of South Africa and the rand rely on confidence in Ramaphosa.

South African sovereign credit ratings
As of November, speculation of a double downgrade on the rand sovereign credit rating was highly anticipated, going so far as S&P downgrading to below investment grade. The result is negative for South African bonds as the result will be removal form the Barclays Global Aggregate Bond Index. Furthermore, the lack of confidence will see outflows of capital of around ZAR42bn ($3.16bn) to ZAR58bn ($4.26bn).

Some positive sentiment has been retained as Moody’s has moved their re-evaluation of the rand to mid-February to allow time for South Africa to resolve issues with the ANC leadership election. The implication of a Moody’s decision come February will decide if South Africa’s sovereign credit rating gets downgraded from investment grade to junk, meaning rejection from the Citi World Government Bond Index. A downgrade from both Moody’s and S&P could see potential outflows from the South African economy by ZAR80bn ($5.87bn) to ZAR130bn ($9.54bn). This would cause a shortage of funding and heighten borrowing costs, exacerbating the ability of the rand and the South Africa economy to recover.

South African rand
Movement of the rand depends on the December 16 election and the market sentiment associated with each of the candidates. Similar to the South African sovereign credit ratings, the rand and recovery also hinges on the outcome of the election. With Ramaphosa being touted as the preferred candidate by the South African and international business community, business confidence in his ability to bring political and economic stability is high. Not only would Ramaphosa's leadership represent the beginning of a new path for South Africa, the confidence the market has placed in him would propel a recovery of the rand. 

In stark contrast, Dlamini-Zuma would very likely further extend and aggravate rand weakness and damage South Africa's sovereign credit ratings. Her connection to the current president, Jacob Zuma, and her campaign rhetoric of public spending largesse would repel investors, resulting in large capital outflows, thereby weakening the rand and the South African economy.
V-lab Source:  V-Lab 

In the run up to the ANC party elections the rand has moved sideways in terms of EURZAR, GBPZAR and USDZAR, after making a comeback from lows in November due to downgrade fears. However, with the ANC conference and election looming, volatility is picking up. Option prices being indicative of the market expecting a 5% move in USDZAR with higher than 50% probability. With implied 1-week volatility at a 2-year high of greater than 35%, the USDZAR market is expected to spring into action due to the ANC leader election.

A report from Nedbank shows the drivers of USDZAR are commodity prices (32%), South African economic fundamentals (13%), carry-trade (31%), and an error term (24%) attributable to political uncertainty, which is especially prevalent given the coming election.

USDZAR
 USDZAR. Source: Bloomberg 
The outcome of the ANC election does not solely impact the error term, but in effect the carry-trade and South African economic fundamentals, as an unfavorable result of the election would diminish confidence in South Africa. The resulting capital outflows and lack of financial security would make the carry trade unattractive for investors.

Conclusion
Cyril Ramaphosa is the preferred candidate by both the individual voter as well as the international community. Given, the amount of corruption in South African politics it is too early to be sure of Ramaphosa's victory, causing the rand to continue to have high volatility. A Cyril Ramaphosa leadership would see value and confidence return to the rand almost immediately and aid in the case for South African sovereign debt to retain investment grade ratings. 

The ANC dominance of South African politics could be changed as result of the party elections. Large numbers of ANC supporters have expressed their intentions to vote elsewhere in the presidential elections in 2019 should Dlamini-Zuma lead the party. This will not have an immediate effect; due to the sheer size of the ANC voter base compared to other parties, but in the long run could create more uncertainty should another political party in South Africa decide to battle for dominance.

However, as mentioned earlier, the outcome of the elections will come down the wire, due to the specifics on the ANC election process, delegates are not bound to vote for the candidate elected by their branch. With corruption a rampant factor in South Africa, it is likely that regardless of the result of the election it will be challenged in a court of law.

– Edited by Clare MacCarthy

*Frederick Wennested-Petersen is a banking and international finance student at Cass Business School. He is currently on a three-month internship with the Saxo Strategy Team.

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