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The uncertainty over the outcome of the looming national election means there are many investors sitting on the sidelines, who would have otherwise been trading bonds or stocks, waiting to see which way the voting goes, according to the South African Reserve Bank (SARB).
“The uncertainty about the election and the election outcome, which should be felt through the country risk premium, which should be felt through the exchange rate and so forth – that is a short-term risk. The outcome of the elections is another,” Governor of the SARB, Lesetja Kganyago said.
No speculation
The bank won’t speculate on what the outcome might be and hasn’t used political assumptions in its economic models. Kganyago pointed out that while his team is excellent at analysing economic numbers, it’s as hopeless as anyone else at analysing politics.
He added, “What matters for what we do is: is there a stable government with a clear policy that we are going to interact with at the central bank? And that’s it.”
SA may have had a single ruling party for the better part of the past 30 years, but it hasn’t always meant stability. A look at policies and it gets even murkier. The North-West University Business School’s Policy Uncertainty Index, which Kganyago gave as an example, showed that policy uncertainty intensified in the first quarter of this year.
It found that the uncertainty around SA’s election dynamics and outcomes next month was weighing on investors and the markets, which had adopted “a tangible precautionary stance”.
Bond markets are bothered
As one example, Annabel Bishop, Chief Economist at Investec, wrote at the end of last week that SA’s 10-year benchmark bond had weakened materially to 11.98%, from 11.27% since the annual budget speech and 11.13% since the start of the year.
“There is likely a risk premium of at least 60 basis points priced into SA bond yields ahead of the elections, as investors worry heavily over an ANC-EFF coalition outcome post-election, with the ANC most likely to see voter support below 50%,” Bishop said.
But, she added, “An ANC-IFP, ANC-MPC (multiparty coalition which includes the DA, ACDP, IFP, FF+, Action SA, UCDP, UIM, EPP, SNP, UNP, but not the EFF) or ANC-DA coalition would soothe markets, and could see a yield rebound towards, if not below, 11.0%.”
The rand is another counter that will tell a story of the world’s view of SA after elections. At the most recent Monetary Policy Committee (MPC) meeting, the central bank said the rand was undervalued.
“So if the rand is undervalued, that means that if there are positive events that come, the rand can only get stronger,” said Kganyago.
If events are negative and the negative news is already in the price, then the events won’t have an impact. If they’re not in the price, the rand will move. It’s going to come down to which investors took which positions and how those balance out, the governor said.
A test of independence
Even though the SARB last year set the date for the MPC’s next meeting on 30 May, President Cyril Ramaphosa recently chose to schedule the national election for the day before the interest rate announcement. After internal discussions, the central bank took a decision not to move its MPC meeting.
“We had to consider these things. Do we bring the MPC for after the announcement? Do we bring the MPC forward or do we push it to after the election and we decided no, we are sticking with our date,” Kganyago said, adding: If ever anybody wanted a case that the MPC makes its decisions independently, this would be it. We will meet. Unfortunately, some people will have to work on election day. They will have to go and vote and then come back and continue working.
The interest rate decision on 30 May, as per any other MPC announcement day, will be based on the data, the governor said. “There is a reason why governors are appointed and have to be independent, precisely so that we are not affected by the political cycle. We must be able to make the decision, irrespective of the political cycle.”
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Financial feats that face the next administration
The new administration and its finance minister will have to continue the task of trying to convince global ratings agencies that the SA government takes fiscal consolidation seriously. Since former president Jacob Zuma fired former finance minister Nhlanhla Nene in a late-night purge in December 2015, SA’s ratings have slipped and its financial outlook has spiralled downward.
Once rated as an investment-grade country, SA is now in so-called junk status. It lost its place on the FTSE World Government Bond Index in 2020, causing a major outflow of funds. The Financial Action Task Force (FATF), the intergovernmental organisation set up to combat money laundering and the financing of terrorism, placed SA on its grey list for noncompliance in February last year.
It’s going to be hard to make a comeback because being investment grade is not about just one or two things, Kganyago said. It’s a combination of far-reaching reforms.
“You just have to go and read the ratings reports,” he said. “One, of course, its point of departure has always been you must have prudent macroeconomic policies and prudent macroeconomic policies are both fiscal and monetary. And then they would want to know, what are your structural policies? They would look at your social policies and all of that. So you have got to demonstrate progress across all of those policies to be able to go back to investment grade. And that would take a concerted, not just government effort, but country effort, to get to there,” the governor said.
Government’s utilisation of windfalls is key
On the one hand, the government has begun working with the private sector with a view to improving Transnet’s services and boosting Eskom’s performance.
On the other, the finance minister promised widespread government cost-cutting in November, but in February, said the state would instead use R150 billion of SA’s finite Gold and Foreign Exchange Contingency Reserve Account to meet some of the country’s debt obligations.
“You can see it as a windfall,” the governor said. “If you have a windfall, you sort out the basics, and it is actually quite welcome that the Treasury said this money will be used to reduce debt.
“This country has had so many windfalls in the past. In 2021 and 2022, we had a windfall from the commodity boom. We have had that in 2008 and 2009. We have had such a windfall for a protracted period of time, between 2001 and 2007.
“So what South Africans must do is to look back and say, how have we previously used the windfalls? Have been we have we been prudent in using the windfalls? That is what South Africans should be asking,” Kganyago said.
He added, “Government must be prudent in how it uses the windfall. It has pronounced now that this windfall will be used to repay debt. That is positive. At least the Reserve Bank had a say on this one.”
The SARB is also able to play a part in helping SA escape the FATF grey list. It’s “absolutely committed” to making sure that SA gets off the list next year. The Finance Minister, new or not after May, and other state institutions will have to work together, with the likes of the Financial Intelligence Centre (FIC) about to get fierce, according to Kganyago.
Fines may start to fly
“You might have seen the FIC complaining about the lawyers and the estate agents. I think the FIC is just going to be throwing the law at them and imposing fines to get them to comply.”
As this plays out and as portfolio investors – who tend to dip in and out of countries and instruments rather than buying in for the long-term – prevaricate ahead of the SA election, there is one important difference from other election years, Kganyago pointed out.
In 2024, more than 2 billion people will be eligible to vote in elections that span 50 countries, including the US and India. Political uncertainty abounds around the globe, not just in SA. Stable governments and clear policies will be in high demand.
