The impact of the elections on SA credit rating

With the election results streaming in, experts are weighing in on the impact that this could have on South Africa’s credit rating when the decisions are made at the end of the year. The local government elections have seen the African National Congress (ANC) taking a hit in the polls, with the Democratic Alliance (DA) gaining a marginal increase in support, and the Economic Freedom Fighters (EFF) doing well in their first local elections.

“There was initially concern that, should the ANC lose some ground to the EFF, it would adopt a more populist approach to mitigate against further loss of votes in the future. However, with the EFF emerging as not eating into ANC support as much as expected, and rather losing support to the more business-friendly DA, the risk of the ruling party taking this approach appears to be waning, and with it, the threat that this poses to SA’s credit rating,” revealed Rian le Roux, chief economics at Old Mutual Investment Group.

This has many wondering how it may impact of the decisions of ratings agencies. But even though there are signs that South Africa is becoming a more mature democracy, commentators from Nomura and Old Mutual Investment Group still believe that a ratings downgrade is likely.

The impact of the elections

In previous months the market has not appeared to be concerned about the risk of a credit downgrade. However, Graham Tucker, balanced fund manager at Old Mutual Investment Group, pointed out that the market remains priced for one.

“Based on the election outcome, the South African rand, local bond market and portions of the equity market sensitive to such variables – such as banks – may experience volatility. However, on the positive side, the local equity market has many companies with a strong global footprint. Therefore any weakness that may be observed in the rand should benefit those counters,” said Tucker.

According to the Old Mutual Investment Group, the immediate outcome of the elections is unlikely to have a direct impact on the potential downgrade decision by the rating agencies at the end of the year. However, the reaction of the ruling ANC to the outcome and the policies that it adopts as a result could impact the rating decisions.

Le Roux pointed out that previously ratings agencies have highlighted the need for the National Development Plan implementation, as well as growth enhancing reform and fiscal discipline. According to le Roux, the outcome of the election will indicate to the rating agencies the likelihood of the government meeting these requirements.

Peter Attard Montalto, research analyst at Nomura, noted that the current voting results do not indicate a clear move to either left or right wing ideologies. “We think this kind of environment where [President] Zuma is pulled in both directions means there will be no leadership on structural reform and therefore downgrades will still occur on 25 November for Moody’s and 2 December for S&P and Fitch.”

While a credit ratings downgrade is still viewed as likely, Montalto highlighted that the ratings agencies may decide to hold off on a downgrade and “look for optimism and change.” Moody’s is particularly susceptible to doing this. “However, broadly we think the growth outlook and a lack of action by year-end will still mean downgrades will occur as our baseline.”

Working towards growth

To help ward off a credit ratings downgrade, the government needs to stimulate growth in the economy. According to le Roux, as foreigners have a large holding of assets in the country, it cannot afford to create a perception that monetary or fiscal policy will move away from conservatism.

Tucker noted that any policies or decisions taken that are not aimed at addressing growth or fiscal discipline will not be viewed favourably by the markets.

“We have previously seen an extreme example of possible market reaction with the termination of then Finance Minister Nene in December 2015 - the rand fell sharply and South Africa’s cost of borrowing increased significantly,” revealed Tucker.

A move by government to address the concerns of the ratings agencies will be favourably received by the ratings agencies and investors, according to Tucker. As a result, the currency could strengthen together with the local bond and equity market.

Zumxit

Montalto stated that a Zumxit (Zuma exit) following the results of the elections is viewed with increasing probability by the market. However, Montalto said that he believes that there will not be a Zumxit before January 2018.

“We think Zuma still has sufficient support on the NEC and in enough provinces to avoid an early elective conference that would be needed to remove him. Equally, we think all sides (for and against him) have already conceded they do not want to be recalling two sitting Presidents in a row,” revealed Montalto.

While the NEC supports Zuma for now, there’s no denying that he has been weakened by the results of the elections. According to Montalto, Zuma is not only constrained by the ‘anti-Zuma faction’ but by those within his own faction too. “The former will try to prevent him taking rash actions and push him towards structural reforms, the latter to keep the status quo (around SAA for instance) and away from structural reform. They will also push him still to make personnel changes.”

Regardless of whether or not Zuma is ousted from government, the elections have set in motion several changes. The DA have taken control of several of former ANC strongholds, with the EFF also making strides into some of the municipalities. Montalto highlighted that opposition parties are warning of the risk of violence following these results. However, looking at the nonviolent transfer of power in Cape Town in 2006, Montalto noted that violence is not an overt concern, but is something to watch for.

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