South African Rand Selloff Reflects Fears of ANC/MK Coalition

President Ramaphosa will need 201 votes in Parliament to retain his position. This means his ANC party must rely on the votes of another smaller party. Image: © Government of South Africa, reproduced under CC licensing.

The South African Rand extended its decline ahead of the weekend amidst fears the ANC would opt to form a coalition with a left-wing opposition party.

South Africa's ruling ANC was expected to lose its majority, but the ongoing vote count suggests it has done worse than expected, affording greater powers to its future coalition partner.

"With 52% of the vote completed in South Africa, ANC stands ahead at 42,34%, followed by DA at 23,39%. MK is ahead of the EFF in third at 10,77%. ANC in the low 40s will make coalition the new buzz word over the next two weeks and the rand is reflecting unease as it approaches R18,76 to the USD," says a note from Nedbank, one of South Africa's biggest lenders.

The Dollar-Rand exchange rate is at 18.88 at the time of this article's update, the Pound-Rand is at 23.98 and the Euro-Rand at 20.42.

The immediate concern for markets is that the ANC will opt to form a coalition with a left-wing party. The obvious options here are the EFF and MK. We suspect the long-running animosity between the ANC and EFF will put MK at the front of the preference sheet, particularly given it is a new party that will likely be pliable to ANC pressure in government.

"In the case of an ANC coalition with the EFF/MK, we think a sell-off is likely, given the fairly low current risk premia and the radical economic policies advocated by the EFF, including large-scale land redistribution. Overall, this will most likely lead to looser fiscal policy, and considering the already-shaky public finances, we think this coalition may cause financial asset prices to falter," says  Giulia Bellicoso, Assistant Economist at Capital 

"ZAR is the worst performing in EM after early projections showed a bigger than expected ANC election loss," says Win Thin, Global Head of Markets Strategy at Brown Brothers Harriman.

For the market, the ideal outcome is an ANC/DA coalition, as this implies continuity and more market-friendly outcomes. If this coalition materialises in the coming weeks a decent rally in the Rand can be anticipated.

"There is an outside chance of a DA-led coalition with the ANC that no one would have had in their models that may just be the silver lining SA was hoping for. Stay tuned, we should have results confirmed and finalised by Sunday," says Nedbank.

An ANC/MK outcome, while being market-unfriendly, would still be the least-worst outcome of any shift to the left by the next government.

Expect the Rand to sell off significantly if the ANC chooses to partner with the extreme-left populist EFF of Julius Malema.

The recent weakness displayed by ZAR suggests this outcome is now being weighed by investors who would think it prudent to take some exposure off the table.