Jostling for cabinet posts between the ANC and the DA has dampened expectations that the government of national unity (GNU) will be stable, says Bank of America Global Research.
In a research note, the lender says it is bearish on the rand due to rising political risk related to ANC-DA talks and the global backdrop. It expects the rand to outperform from the fourth quarter of the year.
“The ANC-DA coalition is less stable than expected, and the US presidential debates on June 27 increase the risks for [emerging-markets foreign exchange]. The rand still looks about 4% too strong relative to the usual drivers,” says Bank of America.
Many headlines in SA are about DA-ANC tension in agreeing on cabinet positions. This has cast doubt on whether the GNU with the DA and ANC at the centre will be stable as markets expected initially. The rand last week breached the R18/$ barrier after the inauguration of Cyril Ramaphosa as president. SA assets rallied strongly last week, led by banking, retail and insurance stocks.
The new government just needs to keep its foot on the accelerator... But no-one should be unrealistic.
— Izak Odendaal, Old Mutual
However, the local currency weakened this week as the ANC and DA struggle to find consensus on the cabinet.
Bank of America says it does not expect the Reserve Bank to cut interest rates this year, as widely expected.
“We are long [rand/dollar] on negative local and global developments ... we do not expect any cuts this year.”
SA’s largest bank, Standard Bank, has said it expects two interest rate cuts before the end of the year, with the first cut at the monetary policy committee (MPC) meeting in September. Standard Bank, which has said last month’s election outcome was favourable to the market, also expects two cuts in the first half of next year.
Nedbank also expects two interest rate cuts before the end of the year. The Reserve Bank’s MPC kept the repo rate at 8.25% for a sixth successive time at its most recent meeting, in May. The committee’s next meeting is scheduled for July 16-18.
Bank of America says that one positive in SA’s economy is the improvement in electricity supply and consumption.
“In our view, the best way to express a positive view on electricity in local markets in SA is to be long asset swap spreads over the medium term as they reflect fiscal risks, which should diminish as a result of higher tax revenues [which are in turn driven by electricity improvements],” Bank of America says.
“The currency should appreciate ... due to better fiscal [circumstances], but this is already broadly in the rand/dollar price.”
Old Mutual Wealth Investment strategist Izak Odendaal said Ramaphosa’s second term would differ from his first because key reforms were already under way.
“The new government just needs to keep its foot on the accelerator.
“But no-one should be unrealistic. If everything was easy, it would have been done by now. And there will be disagreements along the way ... It might be too much to expect the GNU to serve out a full five-year term, but a lot can be achieved in 24 months to cement key reforms,” Odendaal said.
“The trickiest area will probably be fiscal consolidation. SA cannot afford not to stabilise a debt-to-GDP ratio that has almost doubled in the past decade and results in 20c of every rand collected by Sars going to interest payments.
“It is relatively easy for the various coalition partners to agree on feel-good economic reforms that lead to private investment and photo opportunities for ... politicians. It is much more difficult to commit to being disciplined with state money when each party has its own spending priorities.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.