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Solid election outcome paves way for business-friendly reforms in South Africa

Solid election outcome paves way for business-friendly reforms in South Africa

13-05-2019 | Emerging markets alert

Is the ANC election win a vote for South African economic reform? The ANC victory with 57.50% of the votes likely means a boost for business confidence and corporate investments. We expect a number of quick wins with economic reforms, but also see a few longer-term challenges such as the budget deficit.

  • Cornelis Vlooswijk
    Cornelis
    Vlooswijk
    Director African & Emerging Markets Equities

Speed read

  • Improved election result versus 2016 boosts Ramaphosa’s position within the ANC
  • Left-wing populist EFF gains less than expected
  • Investors are keen to see concrete plans and implementation of reforms

On Saturday May 11th the official results of the general elections in South Africa were announced. The governing African National Congress (ANC) has won the elections with 57.50% of the votes. The outcome was more or less in line with the most recent opinion polls. The result for the ANC was worse than the 62.15% they received in the 2014 general elections. However it was significantly better than the 53.91% that the ANC scored in the municipal elections in 2016 when the party was still headed by Jacob Zuma.

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What it means for the ANC – and for investors

The long-term trend is for the ANC to lose its advantage over other parties because young voters don’t give the ANC credit for the liberation struggle that led to the end of apartheid in 1994. In that light it is quite an achievement of the current president and ANC leader Cyril Ramaphosa to attain a significantly better result than three years ago. Ramaphosa can make the convincing claim that he helped to gain back some of the voters that were lost owing to Zuma’s leadership. This is likely to boost his power within the ANC.

Another positive outcome for investors is that the Economic Freedom Fighters (EFF), a radical left-wing populist party has gained less than indicated in the opinion polls indicated. The EFF rose from 6.35% in 2014 to 10.79% and some opinion polls had predicted 12-14% in this election. So the ANC will only feel a limited pressure from the EFF to implement populist measures.

The Democratic Alliance (DA) had a reasonably good result with a small decline from 22.23% in 2014 to 20.77% now. They remain the biggest opposition party and will continue to push the government to implement business-friendly policies.

Next steps

  • 15 May: Parliamentary Vote at which it is expected that Ramaphosa will be re-elected as President of South Africa. 
  • 25 May: Presidential Inauguration 
  • 28 May: New Cabinet

Economic reforms to follow?

The solid election outcome makes it possible for President Ramaphosa to announce and implement economic reforms in order to boost business confidence and stimulate corporate investments. We see various possible quick-wins:

  • Shrinking the size of the Cabinet to become more efficient and effective. Zuma had expanded the Cabinet, and hence bureaucracy and the cost base rose significantly in his nine years in office. The Cabinet now consists of 34 ministers and 35 deputy ministers. According to unofficial reports, Ramaphosa intends cutting this to 25 ministers and 10 deputy ministers, though it is likely that the reduction to be announced on 28 May will be slightly less dramatic owing to opposition within his party.
  • Progress on anti-corruption efforts. The authorities launched various anti-corruption cases against associates of former President Zuma ahead of the elections. It is likely that this process will speed up now and that more cases will be opened.
  • Visa reforms. In order to boost tourism and foreign investments various plans to make it easier for foreigners (and especially travelers from China, India and wealthy Arab countries) to visit South Africa have been announced in recent months. These plans include the introduction of electronic visas, less bureaucracy and more lenient requirements for people from certain countries.
  • Sale of mobile telecom spectrum. This is a complex process with multiple legal issues. As the revenues would be important for the fiscus, the government will work to accelerate this process.

Long-run issues

South Africa is facing some major structural problems which can be tackled only through sound policies and long-run reforms:

  • Improving the debt position. Keeping the budget deficit under control by cutting non-investment expenditure is necessary to avert a downgrade by credit rating agency Moody’s.
  • Improving operational and financial performance at State Owned Enterprises like electricity provider Eskom, South African Airways, the rail, port and pipeline company Transnet and arms manufacturer Denel. This is also important for averting a credit rating downgrade by Moody’s.
  • Business climate reforms. South African businesses and (potential) foreign investors want certainty on regulation and taxation before they commit to investing. In the mining sector there appears to be agreement over the new Mining Charter and this is probably going to finalized soon. The issue of land reform and an official proposal to allow land expropriation without compensation (mostly from white people or businesses) has alarmed the business sector and foreign investors. Ramaphosa has stated there will be no land grab and that land reform cannot be permitted to hamper agricultural production or broader economic performance. If Ramaphosa is able to translate these pronouncements into a clear legal framework, it would provide business with the certainty needed to invest. This would boost business confidence.
  • Labor market reforms. South Africa suffers from very high unemployment levels, with one of the causes being labor market regulation that makes hiring and dismissal expensive. Ramaphosa has already announced plans to implement labor market reforms, and is likely to be emboldened now to speed up the process.

So there are a lot of potential improvements and these could boost business confidence, investments, economic growth and ultimately corporate earnings. However most investors are taking a wait-and-see approach.  This is understandable as many investors were very optimistic after Ramaphosa had become ANC leader in December 2017 and South African president in February 2018, and had expected rapid reforms and improved sentiment that would boost the economy. That did not materialize in 2018. Investors are now waiting for tangible improvements before becoming optimistic and increasing their exposure to the South African stock market.

Portfolio exposure

From a portfolio perspective, Robeco Emerging Markets Equities has as much invested in South Africa as the benchmark. However, a big part of that investment is to a company that is mostly exposed to other countries and only for a very small part to South Africa. Robeco Emerging Stars has a slightly bigger weight in South Africa but also has a limited exposure to the domestic economy. Robeco Emerging Smaller Companies has slightly increased their exposure to South Africa but remains underweight. Robeco Afrika has slightly increased the South Africa weight to around 41% of the portfolio as per the end of April, though the underlying exposure to the South African economy is only estimated at around 28% as some South African companies make most of their profits in other countries.

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