Vladimir Lenin famously said “there are decades when nothing happens; and weeks when decades happen”. The period we are living through might not be the weeks in which decades happen, but it does feel as if we have had a few weeks in which years happened.
The coming months will be interesting as SA moves from ANC dominance to a coalition arrangement. Embedded in this transition are risks and opportunities, and financial markets reflect this.
The rand traded as weak as R19 to the dollar just after the election, then firmed to R17.95 just two weeks later. The currency has since weakened to just more than R18/$, but remains well bid. Government bonds were arguably the biggest losers and beneficiaries of the swings in political sentiment.
The 10-year bond yield rose as high as 12.3% in the period just after the election and retreated to 11.2% when the government of national unity (GNU) news started to filter through. The all-share index (Alsi) is up 5.5% from its post-election low. Clearly financial markets like the GNU.
... the reform agenda as now outlined is insufficient to address SA’s longer-term structural issues
The euphoria of the past few weeks masks the bigger and arguably far more important truth that markets do not reflect a positive structural turnaround in SA’s economic story. The rand remains close to its record low in nominal and real terms. Bond yields in real terms are close to 2002 levels. The Alsi is trading at multiples that match those reached during the financial crisis of 2008 and is flat in dollar terms since 2017.
SA has a lot to do to reverse the profound malaise of the past decade, and we have barely started. Market participants have taken the news of the political transition positively. Embedded in this is the view that the policy direction taken by the previous administration, including growth reforms and fiscal prudence, will continue.
Justice barometer
However, the reform agenda as now outlined is insufficient to address SA’s longer-term structural issues. How well the coalition can make hard decisions will determine if this is a real moment of lift-off for SA Inc. The political parties must overcome ideological and other differences and reach agreement on the trade-offs needed to get the necessary paradigm shift in the economy. Financial markets will continue to give the verdict on whether we are making progress.
The debate in the public square about the appropriateness of financial market prices as a value signal on political choices has been interesting. Markets gave apartheid SA the green light for many years, even as it debased most of its citizens. Post-apartheid SA has managed impressive market performance at times, though it remains one of the world’s most unequal countries. Financial markets are clearly not a barometer of inclusion and justice. However, they are a measure of the cost of capital, which matters.
Government borrows just more than R900bn — half of the R2-trillion it spends yearly. Access to debt markets at a reasonable cost ensures the state can fulfil its obligations. The state spends 20c of every rand of revenue on debt service costs instead of service delivery, up from only 9c in 2008. It is in the state’s interest to lower these costs. Companies use financial markets to access capital, and low equity multiples and high interest rates have made capital expensive. This high cost of capital constrains the ability of companies to invest.
The financial markets' positive verdict on the GNU, and how participants weigh its coming decision, will be important. Cheap capital and functioning financial markets are necessary for economic growth and public service delivery. Both are critical for macroeconomic and political stability. A strong rand, low interest rates and high equity prices do not necessarily improve socioeconomic outcomes for citizens though.
• Lijane is global markets strategist at Standard Bank CIB.
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.