There was very big money in town this week, with as many as five investment banks doing the rounds with visiting groups of foreign investors.
’Tis the season for these visits. The budget has come and gone so the Treasury is in a position to talk; the next monetary policy committee meeting is still a couple of weeks ahead so the Reserve Bank is free to talk; there’s the Bank of America Merrill Lynch annual investor conference at Sun City; and most important, SA’s sunshine offers respite to fund managers tiring of the northern hemisphere winter.
But by all accounts the interest from foreign fund managers this year has been unprecedented. And there’s one thing on their minds: the election. Not that SA might not be of interest anyway.
International bond investors have been pulling their money out of China in the past six months. There aren’t that many other large emerging markets in which to invest instead. SA offers some of the highest real long bond yields in emerging markets. At 7%-8% these should offer investors rich returns. But are they rich enough to compensate for the risk? That’s where SA’s May 29 election comes in, with foreign investors consumed with trying to understand the risks.
Economists and market players talk about the base case and the tail risk. The tail is that scenario which is improbable but extremely negative if it does materialise. From 2023 and into the early part of 2024 most bought the 45%-50% base-case scenario that the polls were indicating, in which the ANC might lose its majority but not by much. That would enable it to form a coalition with a smaller party, or parties, that would largely ensure economic policy continuity.
However, the emergence of the MK party and surveys suggesting the ANC’s support could fall as low as 40% or less have sparked growing concerns over the past couple of months about tail risk. The big fear factor for investors is the risk of a left-leaning populist coalition between the ANC and EFF if the election yields a low outcome for the ANC.
Offshore investors are taking a fairly balanced view, according to one economist, who says they are asking sensible questions about what the polls suggest could be a broader set of coalition outcomes than everyone had been thinking about three months ago. “Anything other than the EFF getting into government will be viewed as neutral,” he says.
While the recent Brenthurst poll shocked market players with its predictions of a 39% outcome for the ANC and rising support for MK, some fund managers are starting to ask searching questions about the methodology of the various surveys and to interpret results accordingly. The Ipsos poll tends to be taken more seriously because it uses a large face-to-face survey and has proved accurate in previous elections. The last Ipsos poll predated MK: the next one will be closely watched.
While the EFF looms large, some are asking what the chances are of an ANC-DA coalition, rather than one with the EFF, in the event of a sub-42% or 43% outcome for the ANC. While the DA continues to say it would never ally with the ANC — and many reluctantly believe this — there’s certainly a view that the DA’s funders would ensure it swiftly changed its tune to prevent an ANC-EFF link-up.
Broadly, the “business as usual” base case still tends to prevail — the consensus one group of investors settled on in their travels this week was 47%. But as Citi economist Gina Schoeman puts it, the view from investors tends to be binary and asymmetrical: they see broadly two outcomes, the okayish finish for the ANC and the dangerous, negative one that forces it into an EFF coalition. Up until February the only coalition party they worried about was the EFF; now they are worrying about MK too — even if everyone (still) sees only a small probability of a bad outcome.
It’s hard to tell whether the market is pricing election concerns into the rand exchange rate or bond yields. Disentangling the influence of global factors on the rand from local ones is difficult. And bond yields are high anyway because of concerns about government’s debt trajectory in the longer term.
But there may be more volatility over the next two and a half months in the run-up to the election. And if the ANC loses its majority by a wide margin we should brace for a bumpy ride for the rand and bond yields in the weeks after the election while coalition talks are going on. One fund manager believes any prospect of a coalition with the EFF could send the rand to R25 to the dollar and add 200 to 300 basis points to bond yields.
An interesting question is how the ANC would respond to that kind of collapse, and what the effect might be on its decision-making. For now though, with analysts putting the probability of the base case at 60% or more, it’s all a bit theoretical. And conversely, any sort of neutral to positive outcome could prompt a relief rally for the rand.
But the monetary policy committee, for one, may have to take any election risk to the rand seriously. It is scheduled to meet the very week of the May 29 election and announce its interest rate decision the day after the poll. No prizes for guessing this will not be the moment to cut interest rates. Political uncertainty and risks to the currency will surely feature in the committee’s narrative.
Perhaps the more interesting and more fundamental question being asked is what it looks like after a “base case” election. In particular, some are asking whether there’s any reason to hope for a pickup in the pace of economic reforms. One outcome to fear might be precisely that the ANC scrapes its 50% majority — and proceeds to settle back into complacency and economic decline.
However noisy this election is and whatever the outcome, the upside is we will have more political competition and contestation. It is an inflexion point from which we are unlikely to go back. There must be money to be made.
• Joffe is editor-at-large.
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