Potential financial market and rand surge with ‘right-of-centre’ election outcome – Dawie Roodt

As the crucial 29 May elections draw near, financial markets are seemingly wagering on the ANC losing its majority and forming a coalition with right-of-centre minor parties. Dawie Roodt, an economist from the Efficient Group, shared with Biznews that the financial markets are already factoring in a favourable outcome, as evidenced by the robust performance of the JSE, bond markets and Rand. Roodt anticipates a potential surge of 20-30% for the JSE, a 200 bips gain for the bond market, and the Rand strengthening to R17 to the US dollar, should the election yield a ‘good outcome’. This scenario involves the ANC’s support falling to around 45% and the formation of a government with political parties ‘slightly to the right’ of the ANC, who would hold Cabinet positions or the role of Speaker.

However, Roodt cautions that the new government will face significant economic challenges, including local authorities that are in disarray and will likely request additional funds from the Minister of Finance, the state-owned enterprises that “have been run into the ground” and the national accounts, which have become unsustainable with debt levels ranging between 75% and 90% of GDP.

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Extended transcript of the interview ___STEADY_PAYWALL___

Linda van Tilburg (01:02.468)

I am Linda van Tilburg and with me is Dawie from the Efficient Group, he’s an economist and we’re going to talk about what economists are expecting from this election and what investors should be looking out for. Hi Dawie, thanks again for joining us.

Dawie (01:18.957)

Thank you, Linda. Very nice talking to you.

Linda van Tilburg (01:21.188)

Well, you just told me you’ve been with a lot of economists in talking about these issues. What are they thinking? What are they looking at?

Dawie (01:31.373)

I would say there are three major issues, and economic challenges in South Africa that the new government will have to attend to. The first one is the local authorities. Now I know this is not a local authority election, but the local authorities, the majority of them are financially just not viable anymore. So, in the end, they will stand outside the Minister of Finance’s door, and ask for money. The local authorities are a mess, mostly, and the local authorities need to be fixed.

One example is that the local authorities owe something like R80 billion to ESKOM and every month that increases by about R2 billion. So, the local authorities are a major, major challenge and perhaps the local authorities are the single most important authority because that is your first port of call. That’s where you get the electricity, or supposed to get the electricity and water and a pavement. Local authorities are Challenge Number One.

Challenge Number Two is the state-owned enterprises. We know that state-owned enterprises are a mess in South Africa. That’s not only ESKOM. Transnet is the most recent troubled child. The Post Office is just coming to an end. Just about all the state-owned enterprises have been run into the ground financially and operationally. That’s going to cost a lot of money to fix and they are crucially important to the economy. 

The third challenge has to do with the national accounts. That is what the Minister of Finance is responsible for. I can give you all the numbers.

The national accounts have become unsustainable. The debt levels have reached levels – depending on how you want to define it – but it is between 75 and 90 % of GDP, and it’s increasing at a rate of about 3 % annually, and that has become unsustainable.

So, those are the three major challenges that we need to fix. Of course, there are many other things, many other policy issues that we have to address labour issues, trade issues, and some international relations issues.

But, I think if you look at these three issues that I’ve mentioned, those are the most pressing issues that need to be fixed by whoever is going to be in government. Of course, that really depends on the political mix going forward. Now, we know we’ve got the far left and we’ve got the far right and somewhere in between, the ANC is probably going to be the biggest party in South Africa. With a bit of luck, we’re going to see the ANC falling below 50%. l

Dawie (03:53.895)

With some bad luck, the ANC will fall too much and they will have to form a coalition with the far left and that will be a very bad case scenario. However, I would say the best-case scenario for South Africa will be the ANC at around 45 %, forming a coalition with some of the smaller political parties slightly to the right of the ANC.

Linda van Tilburg (04:11.812)

If you look at financial markets this week, what are they anticipating?

Dawie (04:17.19)

I think before we talk about the financial markets, I think the financial markets are discounting a relatively good outcome. There are three markets that I think are important to understand. The first one is the equity market. The JSE is probably between 30 and 50% behind similar markets in the world. So, what I’m trying to say is that for the JSE, if there’s a good news story out there, potentially the JSE can go up, let’s be conservative and say 20%, maybe even 30%. 

So, the JSE is a very undervalued market. Equities are very cheap in South Africa compared to other equity markets. The second one is the capital market. Remember South Africa’s capital market is very liquid, and very well regulated, and the capital market can give you a return of about 10%, the yields of 10%, which is also very, very juicy. So, a very good outcome in the elections can potentially lead to a capital market of 200 BIPS again on the capital market. That is the second potential market that can really react quite positively to a good outcome. 

The third one is the exchange rate of the Rand. Recently the Rand has been doing quite well, but the Rand should be trading at about R17 or 17 and a half to the US dollar. It’s trading well away from that. It’s trading at higher than R18 to the US dollar. Recently it came down quite a lot or it appreciated quite nicely. But the Rand can easily go to R17 to the US dollar.

Now, imagine a good outcome and we can talk about what a good outcome means, but imagine a good outcome, then you see the equity markets run by 20%, the bond market gaining 200 BIPS, the Rand going down to 17 or 17 and a half and inflation will come down very, very sharply because of that.

The Reserve Bank can start cutting interest rates and that, without a doubt, is going to boost the economy. Not by much because we’ve got other constraints. We do not have electricity and all that. But the change in sentiment can go a long way in boosting your economy. 

The right political outcome after the elections can potentially lead to a very, very nice case, at least in the short term, a very nice financial market reaction. Eventually, that will spill over to the real economy as well. I think to an extent, the financial markets are slowly discounting a relatively good outcome because we saw the JSE doing not too badly, the bond market doing well, and the Rand also doing not too badly the last week or so. Those are the three markets where I think there are, let’s call it, easy pickings and markets can really, really rally on a good outcome for the elections.

Linda van Tilburg (06:49.732)

Well, some of the decisions that President Cyril Ramaphosa took appear to be typical election decisions, like the signing of the National Health Insurance Bill. But one thing they have not been doing, they’ve not been printing money.

Dawie (07:04.547)

Well, the reason for that is that, yes, the ANC is a horrible government. They’ve done unimaginable damage to the South African economy for a very, very long time. The signing of the NHI  is pure politics. The NHI is not going to happen for various reasons. There are legal issues here, and there are financial issues here, and there are capacity issues here. So the NHI is not gonna happen. So this is just raw politics by the president.

But your comment about the government not printing money, we have to understand politics, not only in South Africa, but worldwide, and that is in a democracy, it’s not political parties that keep democracy intact. It’s the institutions in society, in the country, institutions like the independence of the judiciary, the press, for example, civil society – these kinds of institutions are responsible for keeping democracy in check or place or healthy. 

These institutions in South Africa are quite healthy and quite active and another institution that is also well protected and really survived an onslaught of the ANC is the South African Reserve Bank, the central bank. They are doing an excellent job.

Recently there’s been less pressure on the South African Reserve Bank than I’ve expected. About 10 years ago, there was far more pressure on the South African Reserve Bank than what we have today. I think we should thank Lesetja Kganyago, the governor of the South African Reserve Bank for ensuring that the Reserve Bank remains independent. For that simple reason, they have not been printing money because they do not have access to the printing presses.

The printing presses are under the control of Khanyago, but it’s not only the Reserve Bank, many other institutions in South Africa remain quite robust and healthy in the country as well and that’s part of the reason why I’m actually quite optimistic about South Africa’s democratic future.

Linda van Tilburg (09:14.02)

Well, let’s look at a couple of scenarios. Well, the first scenario you mentioned, is that the ANC falls below 50 % and manages to get a majority with some of the smaller parties and the market appears to be thinking that is what’s going to happen. Let’s look at the worst-case scenario. The ANC does really badly, ends up at 40%, and they have to jump into bed with the EFF. What would that do to the economy and markets?

Dawie (09:39.711)

Well, that’s gonna be really bad news. So, let’s see how the financial market is gonna react. I think if it becomes clear that the ANC is gonna get, let’s say 40%, which means that it will have to form a coalition probably with the EFF. Let me just interrupt myself for a moment. Remember, the ANC or whoever does not need 50%, you need a majority.

So, any grouping or any political party that can have the most support 

can put a government together. You don’t necessarily need 50 %. If the ANC gets 40% and nobody else can master 40%, then the ANC can still form a government. You have to understand that. It’s a minority government, but they can still do that.

So, but let’s say they get 40%, then there’s a possibility of another group forming, getting 40 % as well, and then the ANC will be forced to form a coalition, say, with the EFF, then I’m afraid all sorts of bad things are going to happen pretty soon. The bond markets are going to bomb out, lose 100 to 200 BIPS, the Rand is going to weaken, call it R20 or R22 to the US. 

Equity markets will fall even further and so on.  As I’ve mentioned earlier, those markets are very much undervalued already And the financial markets in South Africa are very liquid and well regulated. 

Unless this new government does something stupid, like stopping all capital flows, for example, unless they do something stupid like that, eventually there will be value. Eventually, Foreigners are going to say, listen, I can buy cheap currency. I can  buy into a very liquid market at a very, very juicy yield and then even with a very bad government, I think the financial markets will find a bottom somewhere and we can see a bit of a bounce on the financial market. So, in financial markets, there will be a negative reaction and then thereafter something positive is likely to happen unless they do something really, really stupid. 

But unfortunately for the real economy, that’s a completely different story. The real economy is going to take a real nosedive. The economy is not growing because of stupid policies and the incompetence of the government. We will actually have more of this. We will have more of the ANC and even more interference in the real economy and all the negative results and outcomes because of that. But the financial markets initial negative reaction and thereafter, perhaps a bit of a bounce. 

Dawie (12:00.862)

But perhaps another piece of good news is that if the ANC gets 40%,

then it’s clear that we are in a transition phase in South Africa and at the next general election we’re going to get rid of the ANC. So, I think that is what is happening anyway. We are in this and it’s a very difficult time, it’s a time of uncertainty, it’s a time of transition and it actually can be compared to what we went through in 1994 and we survived that. 

So, I think the next five years are going to be quite difficult in any event because it is a period, it is a transition period as we’re beginning to get rid of the ANC. Whether they’re getting 45 % or 40%, I think it’s gonna be very difficult for the ANC to necessarily be the biggest party in the next general election. I’ve got a suspicion what we are seeing is that some political groupings slightly to the right of the ANC are slowly coming together, and I won’t be surprised if we see a slightly right-of-centre political party taking over from the ANC, but we’re probably gonna have to wait another five years for that.

Linda van Tilburg (12:55.684)

Let’s look at the opposition parties. We talked about the EFF on the left, but let’s look at the opposition parties in the centre, the new groupings that are coming together. Do you think they would be able to influence economic policy going forward?

Dawie (13:10.494)

Yes, let’s just have a look at ideologically where the smaller opposition parties are standing. You could call the ANC a centrist party because they are the governing party, depending on your definition, but I would call them a socialist party or even further left, a populist socialist kind of political party. Then, of course, a new MK party, that’s a weird party. They’re either far to the left or far to the right, depending on how you look at that.

The same goes for the EFF. They’re far left, the Marxist kind of party, but they’re also far right. They are kind of a fascist party as well. If the MK party or the EFF or even some of the other far left-wing parties form a coalition with the ANC, then the whole thing is going to move to the left, which will be bad. But the majority of the opposition parties are actually to the right, ideologically, of the ANC.

If you’re talking about the Inkatha Freedom Party, for example, economic policy-wise or ideology-wise, is slightly to the right of the ANC. The same goes for the Patriotic Alliance, the same goes for Action South Africa, the same goes for Freedom Front Plus, and the same goes for the Democratic Alliance. All those parties are to the right of the ANC. That’s why I say it’s a very good scenario if the ANC gets 45% because it will be relatively easy for them to cobble together a government with the smaller political parties shifting them a little bit more to the right, firstly, and secondly, forcing them to share power with some of those slightly to the right political parties. Either way, some of the ministries, hopefully the Ministry of Finance, for example, and a couple of other ministries will go to some of those opposition smaller political parties, which are ideologically a little bit to the right of the ANC. That’s why the financial markets are reacting positively at the moment, the last couple of days or weeks because that is what the financial markets are actually anticipating.

Linda van Tilburg (15:02.948)

Can I just look at one other scenario before you go? What if President Ramaphosa doesn’t get the majority that the ANC wants and they kick him out and we have a new president? How would the markets react to President Paul Mashitele? 

Dawie (15:17.019)

That’s going to be a bad-case scenario. I actually believe the President is not gonna be around for much longer and there are several reasons why I say so. One is that typically what will happen is that if the ANC loses a majority, they’re gonna have to point fingers at somebody and the guy they’re gonna point fingers at will be Ramaphosa and he’s going to get kicked out. There are some other reasons why I believe he’s gonna be kicked out as well. One is that I think that there will be an ANC-EFF coalition in Gauteng and we know that Cyril Ramaphosa and the EFF are not the best of friends. 

So, I think there will be pressure from the EFF in Gauteng to put pressure on Ramaphosa to be kicked out as president of the ANC and therefore president as well. So, that leaves us with some possibilities. Paul Mashatele is certainly a possibility. There are some other guys as well. Gwede Mantash is a possibility as a potential president as well. And a couple of other ones as well. I am thinking of Lamola as a possible

Deputy President, not President, but the possible Deputy President, and don’t underestimate Fikile Mbalula. He’s also in the running for one of those two top positions. 

But I think what’s going to happen in practice is that you’re going to have a 45 % coalition of the ANC with the smaller, slightly to the right political parties. I think what we’re going to find is that the Speaker of Parliament is going to be an opposition member, while the ANC will be in a position where they can appoint a President and opposition parties can appoint a deputy kind of president.  I guess that’s the best kind of scenario, that one or two of those top three positions can potentially be appointed by the opposition, whoever is going to be coalition partners. That is not a bad scenario. 

Remember, there are other very important positions as well, like Mineral and Energy Affairs. That’s a very important one. Who’s going to be in charge of the state-owned enterprises, for example? There are many other important ministries as well.

 But I think what we’ve got to see is a real… let’s not call it a government of national unity, but I think the opposition parties will try to vote for somebody else as the Speaker of Parliament, for example, including the EFF, by the way, even if they’re not part of the coalition. Just to spite the ANC, they might vote for another speaker of parliament, just to spite the ANC, because we know that the EFF doesn’t like the President. 

So there’s a lot of fun, I think, waiting to happen in the next couple of weeks in South Africa. But it’s a good kind of stuff, mostly, I would say. The best of all of this is that the ANC is losing power and also what is important is that we’ve got a vibrant and strong democracy in South Africa, and everybody still trusts the electoral system in South Africa. I think that’s another institution that is keeping democracy alive in South Africa.

 So, we went through a difficult time 30 years ago. We’re going through a difficult time now, but I trust democracy and I think, let’s not be scared of democracy. We’re gonna pull this through as well.

Linda van Tilburg (18:27.876)

Davie Rood from the Efficient Group, thanks so much for speaking to us.

Dawie (18:31.381)

Thank you.

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