South African Rand Could See Double-digit Gains Toward Year-end Says Nomura’s Gullberg

There are three candidates and much is at stake in the forthcoming ANC leadership vote. The Rand could either fall sharply or gain by a double-digit percentage in response to delegates' choice of leader to fight the 2019 election. 

South Africa’s Rand could rise by a double digit number toward year-end, according to Nomura’s strategy team, if the ruling ANC party’s December leadership election pans out the right way.

There are three possible outcomes from the December ANC vote and two of those could lead to gains of more than 10% for the Rand, while the other would have only a mildly negative effect on the currency in the short term.

“Up until a couple of months ago the contest for the party leadership was billed as a two horse race,” says Henrik Gullberg, a strategist at Nomura International. “This has changed as Zweli Mkhize (ZM) has emerged as a unifying candidate over the past few months.”

For those who don’t already know, the scandal-plagued incumbent president of South Africa, Jacob Zuma, will not contest the 2019 general election.

In advance of his stepping down at the end of his current presidential term, the ruling ANC party will elect a new leader in December, who will then go on to fight the next election. There are three candidates and much is at stake in the forthcoming vote.

“A three horse race favours Cyril Ramaphosa as Zweli Mkhize will likely erode Nkosazana Dlamini-Zuma’s support in the Premier League and KwaZulu-Natal, while Ramaphosa’s support in the Eastern, Northern and Western Cape provinces, his home province Limpopo and Gauteng, will then likely be sufficient to get him over the line,” says Gullberg.

ANC delegates can choose to go forward with a new leader who will eschew the corruption of the past (Cyril Ramaphosa), they can choose a continuation of the status quo (Nkosazana Dlamini-Zuma) or they can attempt to find a middle ground somewhere between the two extremes (Zweli Mkhize).

“Cyril Ramaphosa is seen as more committed to cleaning-up patronage and corruption than the other candidates. South African Reserve Bank independence would likely be secured,” says Gullberg.

Widespread concerns over corruption and malpractice have led authorities to begin investigating current president Jacob Zuma.

Standard & Poor’s still has an investment grade credit rating attached to South Africa’s local currency debt, although some strategists fear this could go if ANC delegates choose the wrong leader in December.

“This is the most market-friendly scenario,” Gullberg says of a possible Ramaphosa victory in December. “[leading to] Up to a 15% rally in ZAR."  

A desire among Zuma loyalists to shield the outgoing president from prosecution will be a determining factor for some party delegates at the ANC vote, according to Gullberg.

Others are likely to vote according to which candidate is most likely to clear up the reputation of the ANC party and the international reputation of South African politics.

This is while the remaining portion of delegates may prioritise unity when voting in order to avoid a party split into opposing factions of Zuma loyalists and reformists.

“The best chance for Zweli Mkhize to win is if Nkosazana Dlamini-Zuma withdraws from the campaign because that way he could secure much of the vote in the Premier League and probably also in KZN,” says Gullberg. “We think this could only happen if some deal is offered to President Zuma for protection against prosecution.”

Gullberg sees Mkhize’s deal with Zuma loyalists meaning corruption remains a fact of life at the local government level, although national reforms would still be likely and SARB independence protected.

“Therefore, and while this is probably the most unfavourable scenario for CR, it is almost as market friendly as the scenario above. [leading to] At least a 10% rally in ZAR,” says Gullberg.

The worst outcome for markets from December’s ANC vote would be for Nkosazana Dlamini-Zuma to emerge as the new party leader. But Gullberg says this would only be possible if the ‘compromise candidate’ that is Mkhize was willing to drop out of the race and endorse her instead.

An ex-wife of incumbent Jacob Zuma, Dlamini-Zuma is seen as representing a continuation of the same status quo that has seen the South African economy hobbled by the scandal that has plagued the nation’s politics in recent years.

“While this is the least market-friendly scenario, even a Dlamini-Zuma Presidency is likely to be less populist than was feared just a couple of months ago because of the influence of Mkhize,” says Gullberg. “ [leading to] A weaker ZAR (USD/ZAR to 14.25-14.50).”

Gullberg projects that in order to get Mkhize to abandon the race Dlamini-Zuma would need to offer him a high ranking position in any future administration.

His currency prediction for a Dlamini-Zuma presidency is hinged on Mkhize having an influential position from which he can reign in Dlamini-Zuma’s more radical tendencies and also drive some elements of reform.

In the absence of Mkhize being granted such a position, the outcome of for the Rand under a Dlamini-Zuma administration could be much more severe. It might ultimately mean South Africa loses its Standard & Poor’s investment grade credit rating.

With a sharp fall in the currency aside, loss of the investment grade rating could mean a sharp rise in South African yields, higher borrowing costs and an exacerbated budget deficit.