The passing of former South African president Nelson Mandela on Thursday, although an event of considerable gravity in South Africa’s political history, should not have a major impact on local markets beyond some possible influence on sentiment around the country’s political future, to our minds.
The point at which we sit in the country’s political calendar could admittedly amplify sentiment effects, but it should be borne in mind that the issue has been part of market dialogue for some time. Whether or not this event has material consequences for markets should depend in particular on whether it has any material impact on political stability/instability: the balance of power among political parties; the balance of power within the governing tripartite alliance and/or within the Africa National Congress (ANC); risks surrounding possible fragmentation among and/or within these three entities; on policy frameworks or policy choices exercised within these frameworks; and on the strength of South African institutions.
While we would not want to exclude the possibility that one or more of these consequences could play out, it would be difficult even after the fact to trace any such consequences back specifically to this event, and even more difficult to predict permutations of these consequences and of their possible knock-on effects in advance.
Mandela’s absence from the political arena and (even more so) the policy space since the middle of the last decade argues against any immediate or direct policy impacts, which — among the potential consequences we have highlighted above — would probably be the most important from an economic, and currency and broader financial market perspective.
With respect to possible impacts on social tension and labour unrest, any potential damage it could inflict on the currency should be judged largely on how it might impact exports and thus the current account, and on business confidence and thus investment in new capacity. However, it is not clear to us that we are sitting in a situation where there is a lot of pent-up domestic frustration that has not been aired. There is frustration, but it is already being aired, and is therefore transparent to market participants and is probably priced in.
Much of this frustration has its roots in the dichotomous economy and divided society the current administration, initially under Mandela’s leadership, inherited: in unemployment, inequality and poverty; in the inertia — and in some instances, political paralysis — in recent years around policies required to address their structural causes; in a bureaucracy required to be simultaneously effective and to radically transform, to adapt to and reflect a new political reality, and to work from an ideological platform that had been turned on its head; in infrastructure and service delivery impediments; and in the overlay of cyclical pressures endured since the financial market crash of 2008.
We as South Africans are deeply grateful for Mandela’s vision of, and leadership towards, a society that many of us would not have thought could be accomplished. All in all, South Africa’s political tale since the early 1990s has been a remarkable one; there have been many triumphs and there has been no shortage of failures. Many are now hoping that the National Development Plan (NDP) will offer a binding vision for all stakeholders in South Africa’s economic future — one that is intended to involve both stronger and more inclusive growth, building the social cohesion required to establish the foundation for political stability over the long haul.
The NDP might sound like pie in the sky, many aspects of the plan might be vague, and success on the various aspects of the plan will likely be uneven, but it is encouraging that we have achieved consensus at least among all political parties and business that it is the right plan. And the breadth and vigour of objection to the plan within the union movement is open to question.
We know that sentiment can influence markets, and not least of all when fundamentals are lousy, which — in the case of the local currency market — they are. And we know that big moves in markets can have fundamental knock-on effects, which have feedback loops into markets, and so on. However, even if it were sentiment that were to finally tip the rand past the point at which pro-cyclical policy adjustments might be required, it would not be clear what portion of any change in sentiment could be attributed to Mandela’s passing rather than the fundamental drivers of poor sentiment — twin deficits, escalating debt ratios, weak growth with little room for additional policy accommodation, the threat of ratings downgrades and an external financing environment that, courtesy of the US Fed, appears likely to be more challenging than that to which our markets and policymakers had become accustomed in recent years.
However, we think there is already a lot of bad news — domestic and external — priced into the rand. And some of this is a political risk and policy uncertainty premium, to our minds. We probably need to move past next year’s elections, and to get some reassurance that the essentially centrist policy agenda loosely mapped out after the ANC’s Mangaung conference will advance, to see some of this unwind. Unfortunately, doubts whether the rand has cheapened enough will likely persist until the current account starts to show it is turning a corner.
Bruce Donald is head of ZAR Strategy for Standard Bank.
This article was first published by Standard Bank.