- The rand was steady following news of ANCs' proposed government of national unity (GNU).
- Ninety One's Malcolm Charles said a GNU may be more stable than critics might think and said a "mature" coalition could see the 50c-75c risk premium priced into the rand taken out.
- However, Foord Asset Management's Nancy Hossack cautioned that a GNU could see further instability over the next five years, which could add to the risk premium placed on SA assets.
- For more financial news, go to the News24 Business front page.
SA's financial markets reacted favourably to news of the ANCs' proposed government of national unity (GNU) with the rand steady on Friday, despite ongoing uncertainty about which opposition parties would join the proposed structure.
After closing in on R19/$ overnight, the rand traded at R18.88/$ by lunch time. It briefly touched R18.81 earlier in the day. The currency breached R19 earlier this week on reports some ANC members, as well as the ruling party's labour union allies, were opposed to an alliance with the more market-friendly DA.
However, the currency was in positive territory after President Cyril Ramaphosa announced late yesterday that the ANC favoured a GNU following a marathon National Executive Committee (NEC) meeting at the Birchwood Hotel in Boksburg.
The rand was also helped by a weaker dollar, which was hovering close to an eight-week low in morning trade ahead of a crucial US jobs report that might give an indication on the future trajectory of the Federal Reserve's interest rate policy.
"The rand continues to trade in treacherous terrain as markets await further details pertaining to the proposed GNU," said Bianca Botes, a director at Citadel Global. "The devil now lies in the details of what will the agreement entail, [and] what parties will be involved."
Botes added that she believed a formal coalition between the ANC and either MK or the EFF was likely "off the table", which should bring some relief to local markets.
"That could see some of the risk premium priced into the rand start to unwind," said Botes. "The focus for today [Friday], however, is on the jobs report from the US, that will give fresh direction to Fed rate cutting bets in the immediate term."
Initial indications on Friday morning were that the DA, which won about 22% of the vote in the 29 May general election, were prepared to join the ANC's GNU, provided the Constitution remained the supreme law guiding such a governing structure. Julius Malema, leader of the hard-left leaning EFF, by contrast posted on X late on Thursday night that the party was not "desperate" and appeared to suggest the ANC could not "dictate the way forward" if it had not won the election.
Nancy Hossack, a portfolio manager at Foord Asset Management, questioned whether the GNU governing structure was practical, saying it would likely mean market uncertainty would continue in the medium term.
"Based on the instability we have seen in the metros, we think that any agreements are unlikely to be stable for the next five years and as a result a risk premium is likely to remain on SA assets," said Hossack. "This will add to the fiscal crisis that is building as the government is already dealing with a very high cost of borrowing and considerable deficits to finance. It is possible for this risk premium to reduce if growth can accelerate but we would need stability and pro-growth policies to achieve that."
By contrast, Malcolm Charles, a fixed-income portfolio manager at Ninety One, said the GNU could well be a masterstroke by the ANC saying that a co-governing structure of parties with a significant chunk of the vote might be more stable than one that with only slightly more than 50% electoral support.
"If you have four, five or six different parties in a GNU no one party can scupper the deal. I think that's the neatness of the solution," Charles told News24. "I would be more negative if the parties that came together got you to 52% because then you are one internal disagreement away from the whole thing collapsing."
Charles said a GNU also buys Ramaphosa time to work towards forging a more "mature" coalition that upholds the Constitution, maintains the rule of law and works towards sustainable economic growth. Should this occur he said there could be significant upside for SA assets like the rand and government bonds.
"We estimate that about 50 to 60 basis points of our bond yields is election premium," said Charles, specifically referencing SA's R2035 bond, which currently yields about 12.20%.
"The degree to which the adults in the room come to an agreement will determine how much of that [election risk premium] is taken out," said Charles. "And if the adults don't come up with an agreement in the next week, then guess what, it's going north."
Charles added that the rand's current trading levels suggested about a 50 cent to 75 cent risk premium being added to the currency as the ANC's poor showing in the election spooked markets.
Peter Worthington, a senior economist at Absa's corporate and investment banking (CIB) unit, agreed that GNU isn't inherently unstable.
"It depends on the political maturity of the parties involved, and their commitment to whatever common platform they are able to agree," he said.
On Thursday, Ramaphosa said that parties that join the GNU would have to agree to have respect for the Constitution and rule of law in SA.
Former president Jacob Zuma's MK party has proposed scrapping the Constitution and has said it won't enter into an alliance with the ANC if Ramaphosa remains president. Nevertheless, the ANC and MK were scheduled to meet on Friday.
"The EFF and the MK Party want to amend the Constitution, so presumably they would need to agree to shelve those ambitions [outlined by Ramaphosa] in order to be a part of the GNU. That leaves some protection against an extreme downside event," said Hossack. "The DA has stated that it is opposed to being in government with the EFF or the MK Party because they are not committed to the Constitution. Whether they would reconsider that if the EFF agreed to not push a constitutional agenda remains to be seen. I would imagine that the MK Party is an unlikely GNU partner at this stage."
The ANC's showing in the general election was its worst since the advent of democracy in 1994, and with 40% of the vote it did not win an outright majority for the first time.
Magda Wierzycka, CEO of asset manager Sygnia, told News24 prior to the outcome of the ANC's NEC meeting that a GNU could turn out to be a "mess".
"It's everyone holding everyone else to ransom," she said.
Wierzycka said the best outcome for markets would be a DA-ANC coalition, but an alliance with the EFF or MK could see the rand "tank".
"The implications are very significant in terms of foreign perception," she added. "The depreciation and sell-off of the rand has such significant implications - inflation, no fixed investment, no job creation, debt levels going up, the inability of government to be able to raise debt or roll over debt."
By lunchtime, the JSE's all share index was marginally weaker. Retailers rallied following positive results from TFG, while mining shares suffered losses.
