The following commentary on the ANC leadership election has come from award winning, South African political analyst Nic Borain of BNP Paribas bank. We find his analysis of the election outcome to be insightful and a useful contribution to the debate on the political future of South Africa.

After months of campaigning, we finally have the results of the ANC leadership elections. Deputy President Cyril Ramaphosa won the elections, being appointed new President of the ANC. Nkosazana Dlamini-Zuma, President Zuma’s chosen successor, lost by 179 votes. Markets rallied significantly after the results. The ZAR is now trading at 12.70 (down from 14.50 in November and 13.50 last Friday) and 10 year bond yields dropped to 8.9% (down from 9.5% in November and 9.2% on Friday).

However, the outcome of the protracted leadership battle was complex. The appointments to the Top Six positions of the ANC highlight the extent of horse trading that Cyril Ramaphosa had to engage in to ensure his victory as new ANC president. We worry that markets have overextended their rally.

The new African National Congress Top Six leadership announced are:

President                                         Cyril Ramaphosa

Deputy President                             DD Mabuza

Secretary General                           Ace Magashule

Deputy Secretary General               Jessie Duarte

National Chairperson                       Gwede Mantashe

Treasurer                                         Paul Mashatile

DD Mabuza, who is now one step away from the presidency, Ace Magashule and Jessie Duarte have been amongst the strongest fighters for different aspects of the state capture agenda. Having total control of the secretary general’s office gives this group total control of the workings of the African National Congress, in our opinion.

Cyril Ramaphosa is now effectively trapped by a golden handcuff, while those he had fought to curtail have taken over the most important levers of power in the ANC.

South Africa has extremely deep and serious problems and it is unlikely in our opinion that Mr Ramaphosa will be able to apply himself to combatting corruption and nepotism when some of those most guilty of these tendencies are amongst his most senior and powerful colleagues.

If Mr Ramaphosa’s reformist challenge had been defeated at the presidential level, at least he and his colleagues would have had the opportunity to break away from the organisation and challenge it in the 2019 elections. Instead he is going to lead an organisation, deeply tainted by allegations of corruption and state capture to a probably poor showing in the 2019 elections. The opposition parties are probably cheering, in our opinion.

The economics of the ANC leadership outcome

From an economic standpoint, the 3-3 split between what we consider the ‘reformists’ in the ANC (i.e. the Cyril Ramaphosa camp) and the previous ANC leadership (the pro-Zuma camp) remain deeply troubling. Under this new top leadership structure we remain highly sceptical on the ability of the party to meaningfully address the severely needed structural reforms and bottlenecks. A significant amount of damage has already been done to key state institutions and ministries which, in our view, will continue to take years to rebuild. The strong pop to confidence (both business and consumer) we had hoped for post today’s leadership outcome now seems very unlikely once the dust settles and, in the absence of any large upside surprises being delivered by the new incumbent, means that negativity is likely to begin creeping back into the currency which has been a clear outperformer over the past month.

What would change our minds?

If we were to provide a list of what Mr Ramaphosa’s new leadership would have had to undertake as a matter of urgency (probably before the end of January/21 February national budget) to give the economy the (short-term) confidence boost and undertake the mammoth task of rebuilding the ailing economy (and party), it would include:

  •    An early recall of Jacob Zuma as president of the ANC by late Jan/early February.
  •    A change of political leadership of the Treasury (fin min and deputy fin min) before the 21 Feb budget.
  •    A change of leadership at the South African Revenue Service (SARS).
  •    Significant changes in management and boards of State-Owned enterprises.
  •    A significant change in leadership of the national prosecution authority and other criminal justice units (including the Hawks).
  •    Various ministerial changes: Mineral resources, Social development, Public enterprises and Energy.
  •    A strong reassertion of the country’s National Development Plan (macroeconomic blueprint which became policy in 2011/12).

We are concerned, however, that the political will to undertake any of the above decisions now seem extremely unlikely. And further ratings downgrades (by Moody’s at least) are probable next year.

The bottom line for us is that we are very unlikely to see significant upgrades to our current 1.1% GDP growth estimate for 2018, even with Mr Ramaphosa now supposedly in ‘control’ of the party. The structural weaknesses in the economy are deep and well-entrenched. Likely SOE bailouts in H1 2018 (particularly Eskom); deeply questionable fiscal sustainability; deep-rooted corruption in national, provincial and local government; further credit ratings risks; and building socio-economic pressures (for free tertiary education for the poor for instance) mean that yet another challenging year beckons for the SA economy.

Nicholas Borain, Jeffrey Schultz – Market Economics

CEEMEA Economic Commentaries| 18 Dec 2017 18:09