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JOHANNESBURG — Zexit is producing some short-term economic benefits with the rand strengthening and South African bonds looking more attractive. Global investors will be looking carefully at Cyril Ramaphosa and the noises he makes. Already, Wall Street is cheering his exit. At the time of writing, the rand was trading at R11.67/$. South Africa now has a long road ahead to fix up the mess left by Jacob Zuma. – Gareth van Zyl
By Ben Bartenstein, Aline Oyamada and Justin Villamil
(Bloomberg) – Traders couldn’t be happier to see the end of South African President Jacob Zuma’s nine years in power.
The 75-year-old leader had driven Wall Street to wit’s end in recent years amid ratings downgrades, declining growth and a string of scandals. After surviving multiple attempts by opposition parties to oust him throughout his presidency, he agreed to step down late Wednesday. The rand rallied to its highest level since February 2015, following weeks of maneuvers by the ruling African National Congress to remove him from office.
“This is a very big relief,” said Shamaila Khan, director of emerging markets at AllianceBernstein. “Institutions had been deteriorating rapidly.”
Zuma’s resignation opens the path for his deputy, Cyril Ramaphosa, to take the helm of Africa’s most-industrialized economy. Ramaphosa may be sworn in as president on Friday, according to a schedule released by Parliament earlier.
The ANC said it wants a quick transition so Ramaphosa, a 65-year-old lawyer and one of the richest black South Africans, can move to fulfill pledges to revive the struggling economy, clamp down on corruption and rebuild its image ahead of elections scheduled for mid-2019.
South Africa’s five-year credit-default swaps tightened 3.5 basis points on Wednesday to 154 points – 14 points away from the five-year low reached in January.
Here’s what Wall Street had to say about the news:
Khan: “It’s obviously a positive development and will lead to improvements in institutions down the road,” she says. While the rand had already rallied in anticipation of Zuma’s resignation, a recovery in risk assets should propel the currency even higher, according to Khan. She favors South African corporate and quasi-sovereign bonds.
Zuma resignation SA's best Valentine's Day gift ever – painted into corner after 8 days of negotiations, resigned an hour before the ANC's deadline. Rand has gained 20% since the prospect of #Zexit emerged, says job-creating capital will now flow into SA. https://t.co/0hYF8mJWkG pic.twitter.com/V7M3Ln8PP5
— Alec Hogg (@alechogg) February 14, 2018
Ray Zucaro, chief investment officer at RVX Asset Management in Aventura, Florida: Zucaro, who has been underweight South African debt, says he’s willing to increase his exposure now and favors the belly of the bond curve. “This is kind of what I have been waiting for” to buy the nation’s debt, he says. “Zuma’s possible resignation has been brewing like a soup on the back burner for a while.”
Erik Nelson, a currency strategist at Wells Fargo: “There’s been this expectation for months now that eventually he would be removed from office.” He says optimism had been priced in after Ramaphosa came to power and expectations for Zuma’s removal climbed. “There are still large challenges on the economic, fiscal, and political fronts. I wouldn’t say Zuma being removed is a panacea,” he said. He expects the rand to gain steadily amid dollar weakness.
Win Thin, head of emerging-market currency strategy at Brown Brothers Harriman: “This was already priced in,” he says about the muted market reaction. Thin says there is a risk that the rand will weaken Thursday as investors “buy the rumor and sell the fact.” The broader backdrop of rallying emerging-market currencies will help the rand, he says.
`Off to the Races’ for South Africa Assets as Ramaphosa Steps In
“This is the Cyril bonus,” said Wayne McCurrie, the head of portfolio management at Ashburton Investments Management Co. in Johannesburg. “Happy days are here again. So it’s just off to the races.”
Ramaphosa is set to be sworn in as South Africa’s fifth post-apartheid president later on Thursday after Jacob Zuma announced his resignation Wednesday night. Growth has averaged just 1.6 percent a year since Zuma took office in 2009, undermined partly by a series of policy missteps and inappropriate appointments that rocked investor and business confidence. Ramaphosa has pledged to restore fiscal responsibility and root out corruption and mismanagement.
The benchmark FTSE/JSE Africa All Share Index was up 3.5 percent by 11:39 a.m. in Johannesburg. Lenders including Standard Bank Group Ltd., FirstRand Ltd. and Nedbank Group Ltd. all climbed to all-time highs as the sector index gained as much as 5.4 percent. Other South Africa Inc. stocks – those that benefit from growth in the local economy – also surged, with the personal and household-goods gauge leaping 9.1 percent.
The rand, already the best-performing major currency over the past three months, extended its run, gaining 0.8 percent to 11.6200 per dollar, its strongest level since February 2015. Yields on benchmark government rand notes due 2026 fell nine basis points to 8.3 percent, while those on 10-year dollar bonds shaved off five basis points to 5.13 percent.
Credit risk is falling too, with the cost of insuring the country’s debt against default for five years using credit-default swaps dropping three basis points to 154, lower than those of Brazil and Turkey.
There are risks ahead, according to Adam Cole, the chief currency strategist at RBC Europe Ltd. On the downside, these include the budget presentation next week, which would have to convince investors and rating companies that the new leadership is willing and able to tackle economic challenges. On the positive side, there will probably be a review of the controversial mining regulations that have stymied investment in the sector, he said.
An index of mining stocks advanced as much as 3.5 percent, the most since November.
“Now Zuma’s behind us, the market’s clearly going to be looking forward,” said Julian Rimmer, an emerging-markets trader at Investec Bank Plc in London. “International investors have generally been underweight South Africa for several years. I think they will all be scrambling to increase those weights.”
Cyril Ramaphosa: The Audio Biography
Listen to the story of Cyril Ramaphosa's rise to presidential power, narrated by our very own Alec Hogg.