South African election preview
May 3, 2019
South African elections are set to take place on Wednesday 8th May, with the results expected within 48 hours of polls closing. That being said, most polling stations report results within 24 hours so the market reaction will likely occur on Friday.
Even though the ANC party are largely expected to maintain control of the National Assembly, the size of their commanding majority remains crucial for the success of both market reforms and financial markets alike.
A strong majority for the ANC, say 60% +, would likely prompt a significant rally in South African assets and the currency due to the result issuing President Ramaphosa with a strong enough mandate to reshuffle the remains of the Zuma cabinet and push through market friendly reforms. However, such a rally doesn’t come without risks.
Should the ANC receive the relevant backing from the electorate but reforms fall short of market expectations, the populist leader will have nowhere to hide and things could get even worse for South African assets.
Short-term downside for the rand also comes in the form of an outcome under the 60% range, which would highlight a significant decline in the party’s popularity under Ramaphosa’s leadership. This could fuel internal conflict and threaten the prospects of proposed reforms – which range from loosening visa restrictions to restructuring state owned entities.
The party continues to battle with a tarnished reputation, in-house divides, and deteriorating socioeconomic fundamentals but Ramaphosa’s individual polling provides a glimmer of hope for Wednesday’s result to surprise to the upside.
Currently, polls range between the 55-61% mark, a far sight short of the 62.2% seen in the 2014 win for Zuma.
The national election will be the first hurdle for Ramaphosa to clear and will prove pivotal for building investors’ expectations. However, the next stages are no walk in the park. South Africa’s political and economic outlook remains testing and any reforms will be under increased scrutiny given the country’s tentative credit rating over recent months.
Passing the proposed reforms to meet the market’s expectations is no easy feat either as President Bolsonaro is currently finding out in Brazil.
Overinflated expectations of economic reform continue to prompt BRL weakness, a theme that may extend to South Africa if Ramaphosa overpromises.
Monex Europe targets 14.00 in USDZAR for May given favourable election win for Ramaphosa
Regardless of risks being tilted towards an underwhelming outcome for the ruling ANC party, Ramaphosa’s recent polling and fiscally responsible track record to date is encouraging.
We remain our bullish stance on ZAR over the short-term horizon, expecting USDZAR to test the 14.00 handle in the coming month should a strong mandate be delivered.
While the short-term price of the South African rand is a function of the election outcome, the longer-term horizon remains clouded. Market expectations after the election will prove key for determining ZAR’s future trading range.
The prospects for South African assets, especially the rand, will be dependent on the composition of the future cabinet, Eskom’s labour reforms, and the opening of South Africa’s economy to international investors. Key appointments to the cabinet include the Minister of Energy, Minister of Trade and Industry, and Minerals and Energy Minister.
Irrespective of the political angle you take in the run-up to the election, one thing is a given; volatility in the South African rand will increase dramatically at the back-end of next week as the results of the election drip feed into the market.
Further, any short-term move the currency has made could be completely reversed, and then some, at the back end of May when the newly-elected President could unveil the government’s long-term plans to the nation in either an inauguration ceremony on May 25th or a State of the Nation Address shortly after.
Author: Simon Harvey, FX Market Analyst at Monex Europe.