Former President Jacob Zuma
President Jacob Zuma resigned with immediate effect on 14 February, after the ANC decided to proceed with a no-confidence vote against him. Cyril Ramaphosa will become acting president and the National Assembly has 30 days to choose a replacement for Zuma. Ramaphosa will likely be elected in a permanent capacity and will deliver the State of the Nation address tomorrow.
According to a research note from UBS Wealth Management:
- Zuma’s exit may be followed by a cabinet re-shuffle, greater efforts for fiscal consolidation and further governance changes at state-owned enterprises. This should lower the probability of a rating downgrade by Moody’s in March, although the risks remain considerable.
- We reiterate our overweight positions on South African credit and equities. While credit no longer provides a valuation advantage over peers, the recent correction offers a good entry opportunity, in our view. In equities, we expect a lower risk premium to attract investors, while a brighter economic outlook and improved governance should boost corporate earnings growth.
- We have adjusted our USDZAR forecast to 11.5, 11.3 and 11.0 in three, six and 12 months, respectively (from 12.0 across the board).
UBS Wealth Management’s view
Jacob Zuma was elected president in 2009 after then-President Thabo Mbeki resigned before the ANC’s national executive committee (NEC) could bring forward a no-confidence vote to push him out. Almost nine years later, President Zuma has resigned, preempting a vote of no confidence he was unlikely to survive.
On Wednesday morning (14 February), after several days of talks between the NEC and Zuma to negotiate his exit, the ANC decided to proceed with a no-confidence vote against him. Since the ANC has 249 members in parliament and the motion requires 201 votes to pass, the probability of Zuma surviving the vote was quite low. Hours later, Zuma resigned his post as president of South Africa with immediate effect.
The new ANC leadership, led by Cyril Ramaphosa, has improved market sentiment since the ANC election in December. The South African rand appreciated close to 15% (from 13.5 to 11.65 per US dollar), MSCI South Africa jumped by more than 15%. Ramaphosa’s commitment to growth-stimulating macroeconomic policy will likely brighten the reform outlook.
In our view, Ramaphosa will help to rebuild policy credibility in South Africa along with governance changes at state-owned enterprises. The announcement of the budget due on 21 February will be a crucial next signpost about the government’s willingness and ability to push the much-needed fiscal consolidation forward. Moreover, Zuma’s exit may be followed by a cabinet re-shuffle and further governance changes at state-owned enterprises. In combination, these changes should lower the probability of a rating downgrade by Moody’s in March, although the risks remain considerable.
Moreover, we expect current dynamics to boost confidence in the new leadership both locally and internationally, which can have a positive impact on South African asset prices but also help to improve the country’s growth outlook. A strengthening currency should eventually allow the South African Reserve Bank (SARB) to cut its policy rate, although we expect the SARB to err on the side of caution. This should have a positive impact on the growth outlook and gradually stabilize public finances.
Nevertheless, restoring business confidence won’t be easy. The economy remains constrained by endemic corruption, a high unem- ployment rate, and a rigid labor market. The ANC remains split between pro-Zuma and pro-Ramaphosa supporters and several top members of the party are facing corruption allegations. We believe temporary setbacks to South African asset prices look likely, espe- cially given the pronounced rally. However, we think the ongoing push for reforms should fundamentally support the market in coming quarters.
Investment implications: a brighter outlook for 2018: UBS Wealth Management
We reiterate our overweight positions on South Africa in credit and equities.
In credit, we turned overweight on South Africa in mid-December, right after Ramaphosa was elected ANC president. This decision has benefited the performance of our emerging market credit model portfolio, as corporate and sovereign spreads have rallied by more than 50bps on average, closing the valuation advantage South African credit offered over similarly rated peers. This said, we think the most recent correction, which saw spreads of emerging market sovereign and corporate bonds widening by roughly 20bps, pro- vides a nice opportunity for investors to add exposure to South African credit. Our base case scenario foresee a tightening of South African credit spread by another 20-30bps over coming months. Please have a look at our EM model portfolio and our weekly Emerging Markets Bond List for individual bond recommendations.
In equities, South Africa remains Most Preferred, as we expect a higher probability of economic reforms and better governance to improve economic activity and boost corporate earnings growth. A cyclical recovery will benefit the domestic sector and better governance will likely support further inflows into the market. In our view, earnings forecasts could be revised upwards, providing support for further rerating as the risk premium declines.
We have adjusted our USDZAR forecast to 11.5, 11.3 and 11.0 in three, six and 12 months, respectively (from 12.0 across the board). We expect volatility to remain high. Ramaphosa’s leadership has a window of opportunity to reduce some of the structural headwinds that have been weighing on the rand in recent years. The current account deficit has narrowed over the last few years, which is pos- itive and should limit the rand’s downside at times of less favorable global conditions. Still, South Africa remains dependent on volatile portfolio inflows and is vulnerable to related setbacks.
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