Business

Markets cheer ANC win

2019-05-12 09:01

Investors and the rand are celebrating the ANC’s majority in the national elections together with the party, but economists warn that the joyous sentiment will only last for a few weeks.

They all agree that despite the firm mandate from voters, President Cyril Ramaphosa will have to show – sooner rather than later – that he is serious about instituting reform at struggling state-owned entities such as Eskom, having a smaller Cabinet without inept ministers, and generating policy certainty that will restore business and investor confidence.

“A week may be a long time in politics, but five years is an incredibly short time to prove that you can do what is required,” said Raymond Parsons, a professor at North-West University’s business school.

Johann Els, chief economist at the Old Mutual Investment Group, said this was Ramaphosa’s last chance. Foreign investors and credit rating agencies will give South Africa no more reprieves.

Moody’s is the only one of the three major credit rating agencies to still rate South Africa at investment grade. It postponed a decision about South Africa until after the elections.

Els said South Africa has had positive election results, which carry the potential of restoring economic confidence in the country.

The results should strengthen the president’s hand when it comes to introducing decisive policy changes and continuing to build on what he had begun to do since taking office.

If Ramaphosa continues on this trajectory, confidence in South Africa’s long-term future will increase – and that will lead to higher growth.

Parsons said that a clear economic direction was now required to remove policy uncertainty, restore business confidence, strengthen investor sentiment and promote growth.

Hugo Pienaar, chief economist at the Bureau for Economic Research, said the ANC’s comfortable majority would be good for investor confidence and usher in the sort of stability that markets approve of.

“That does not mean investors are pro-ANC, but rather, that they are pro-stability. Investors like consistency.”

Pienaar is of the opinion that investors are more likely to make decisions based on the composition of his Cabinet. “Will the president have factions that need to be satisfied? What is the calibre of the ministers he will appoint?”

Parsons agrees that the key test for Ramaphosa will be whether he appoints trustworthy ministers who inspire confidence in markets and business leaders, and whether he will make the Cabinet smaller, as he has previously promised to do.

Dr Christie Viljoen, an economist at PwC, said it would also be important to see whether the new ministers support Ramaphosa’s reforms, or whether those individuals whose names have been mentioned in relation to state capture would form part of the new Cabinet.

Els believes there will be no overnight change, but that confidence will increase steadily. When that happens, and economic growth has started to recover in 2020-2021, Ramaphosa’s target of $100 billion in new investments over the next five years would be easily attainable.

“Eventually, the next three to five years will be a much better environment for the South African economy than the past five to eight years.”

However, Viljoen said, uncertainty about the expropriation of land without compensation makes investors nervous. It could negatively influence future investment in South Africa, especially in the property market.

He also said that the possibility of the ANC working with smaller, more radical parties such as the EFF in order to attain a two-thirds majority in Parliament, could raise investor eyebrows.

On Monday, the currency was trading at R14.49 against the dollar, and gradually strengthened to R14.21 by lunchtime on Friday, when the ANC’s majority was already clear.

Pienaar said the election results would have no immediate influence on foreign direct investment, but would affect capital flow in the short term.

Regarding capital flow in the week up to May 3, there was an outflow of R1 billion on the share front. For the year to date, the net outflow was R26.9 billion. “That is a significant turnaround from last year’s R32.7 billion capital inflow,” said Pienaar.

Regarding government bonds, there was a capital flow of R1.3 billion in the week leading up to May 3, and a net inflow of R23.9 billion for the year to date.

Pienaar pointed out that investors see government bonds as an attractive investment option because they can deliver favourable returns over the short term, despite South Africa’s fiscal problems.

He said shares were less attractive because South Africa’s GDP was so poor.

That means companies that are listed on the JSE deliver weaker returns for investors, hence the capital outflow.

Trade war jitters
A full-scale trade war between the US and China, with tariffs being repeatedly imposed between these two powers, could cost South Africa’s GDP as much as 0.3 percentage points. 
This is according to Raymond Parsons, a professor at North-West University’s business school. 
It could be disastrous for South Africa, which has been stuck in a low-growth band of about 1% for some time, he warned.
This week’s deadlock in negotiations over a trade agreement between the US and China is therefore concerning for South Africa, with its small, open economy, added Parsons. 
Negotiations between US and Chinese trade delegations continued in Washington on Friday, despite US President Donald Trump increasing tariffs on $200 billion worth of goods from China, as he had threatened to do on Twitter last Sunday. 
His tweet caught the market off guard because US officials had last week indicated that an agreement was within reach. But things began to fall apart later that week, after China sent a new draft agreement with amendments, which would reopen certain issues which had already been negotiated on. 
Apparently, about 90% of the agreement had already been finalised when China sent through the new draft agreement. 
The new set of tariffs, imposed on more than 5 700 categories of products, was increased from 10% to 25%. It affects products such as bicycles, cooked vegetables, Christmas lights and baby chairs.
Parsons said the cumulative effect of previous tariff increases had already led to a slowdown in world economic growth. 
Tariffs on steel imports into the US imposed by Trump last year have also had a negative effect on South African steel and aluminium exports to the US. 
According to the department of trade and industry, it could eventually cost South Africa about 7 000 job opportunities. 
In addition, China is a big market for South African raw materials, and a slowdown in the Chinese economy would be a setback for us, said Parsons. – Riana de Lange


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September 22 2019