ProudSA - Cyril Ramaphosa

This is particularly telling when you consider when to begin assessing newly elected ANC President Cyril Ramaphosa’s first 100 days in office. Rather than 18 December 2017, when his victory was announced, the true starting point is 13 January 2018, following the first meeting of the new ANC National Executive Committee (NEC). Note that this NEC statement of intent gave the first indication of how a Ramaphosa-led ANC might operate. It had everything to do with the collective, and not the man himself.

This statement of intent gave the first indication of how a Ramaphosa-lead ANC might operate and the priorities on the table. Ramaphosa’s speech was heavy on unity speak, came out tough on combatting corruption (in both the public and private sectors), and touched on revitalising the economy while committing to free education and responsible land reform. But the elephant in the room, a recall of State President Jacob Zuma, was neatly sidestepped. With the voice of the NEC embedded in Ramaphosa’s words, the new ANC president’s speech had everything to do with the collective, and not necessarily the man himself.

In light of this, what is blatantly obvious to South Africans, the markets, international investors and political and economic commentators is that Ramaphosa starts his 100 days on a tightrope. Much of this has to do with the fact that he presides over a divided NEC.

As FNB Securities’ Head of Research, Chantal Marx, puts it: “You have the good guys and the bad guys working together and the good guys trying to get the bad guys to be less bad… you have the patronage and non-patronage factions sitting together around the table in the NEC. They’ll talk about unity a lot but the downgrade in June 2018 will be inevitable, since we’d likely continue on the path we are on currently.”

This is unfortunate since some vital reforms are necessary if growth is to be reignited. The main priority says Marx, is fixing the state-owned entities, which are “guzzling cash at the moment” and “are our biggest source of fiscal liability and the reason why the ratings agencies are unhappy with us”. The country needs policy certainty, less red tape associated with running and operating a business, improved immigration policies, increased infrastructure spending in conjunction with the private sector, and to finally push ahead with the National Development Plan (NDP).

In the absence of these steps, it seems more of the same is likely. So what does that mean for the economy? “We don’t think there will be much of an effect on bond yields, equities or property because it is already baked in,” says Marx, predicting that growth, with little chance of reform, would remain around 1.5% and the Jacob Zuma issue would continue to hang heavy over the new leadership.

That said, even with a split in the NEC and Top Six, Ramaphosa might have some wiggle room to affect some necessary changes, says Marx. The question is, notes Professor Richard Calland of independent consultancy The Paternoster Group, if Ramaphosa is the right man for the job. “Cyril Ramaphosa has the CV, one would argue,” Calland told a recent Citadel Wealth Management client event. “But does he have the political nous to turn the NDP into a workable plan?” 

The ‘Ramabuza’ stalemate

One man who thinks the hype around Ramaphosa’s ability to clear out the rot within the ANC is overblown is Citadel Investment Service’s Chief Investment Officer, George Herman. “Whatever positive sentiment/news/flows/pricing you expected on the back of a Cyril Ramaphosa win… you’ve had it. It’s done. The Ramaphosa euphoria has morphed into a ‘Ramabuza’ [Ramaphosa-ANC Deputy President David Mabuza] stalemate, which leaves all the previous plans within the ANC perfectly intact.”

With Ramaphosa lacking a clear majority within the ANC Top Six (which is all but split down the middle between Ramaphosa allies and patronage candidates) as well as the 80-member NEC, it seems likely that the new man at the helm will be hamstrung when it comes to implementing meaningful policy changes and stamping his authority on the new ANC leadership. This fact, says Herman, puts a lot of permutations on the table for how the first three to four months of 2018 will pan out. He predicts that “the party is over”, despite the rand ending 2017 some 13% firmer than it was in January.

“There was a lot of positive expectation about a Ramaphosa win and the markets very quickly reacted to that,” admits Herman, with reference to the rand hitting around R12.30 to the US dollar in the wake of his victory. “Why? Because the markets were expecting a few things attached to Ramaphosa, namely that he is more business-friendly, he understands the risks of ignoring rating agencies and that might give us a stay of execution, which would be fantastic for the country. Also, there was the hope that Ramaphosa understands the terrible price of corruption, and that we’d have more policy coherency in, say, mining.”

But Mabuza’s role dramatically changes this rosy complexion, says Herman, and “Ramaphosa’s ability to change will be hamstrung” as a result of the former Mpumalanga premier’s influence in the organisation.

Recognising these political and power-grab machinations at play, Herman does not paint a halcyon picture for the long-term investment perspective of the country. “Ramaphosa has to handle the next few steps very carefully. He’s going to placate both sides: business and the populist wishes of the other slate. So he’ll probably take things slowly... The February Budget is already in a tight spot and Mr Ramaphosa has no magical wand to undo the latest promises by President Zuma. So expect huge tax changes and hikes,” says Herman.

The markets will take note of this and, without greater policy certainty and a government which oils the process of doing business each step of the way, then it is unlikely that global businesses will be flocking back to South Africa anytime soon.

Remember too, says Herman, that South Africa’s prospects are also determined by the global situation and risk appetite which investors have for emerging markets and for the carry trade [borrowing at low rates and investing in currencies with higher interest rates] to continue. Those issues are much larger than small South Africa-focused issues. “There are bigger factors at play globally, but the reality is that 2018 will make the end of global liquidity and liquidity will tighten in 2018 and reach a point when it turns negative in 2019,” he says. “So we are in the sunset phase of risk-taking and the emerging market space is going to face a much tougher time in 2018.” South Africa too.

Business must ‘wait and see’

In fact, right now Herman admits to being more upbeat on the prospects for Zimbabwe from a business perspective than he is on South Africa. Although, the simple fact that Ramaphosa is in the ANC hot seat is expected to add as much as 1% to GDP, simply due to an improvement in sentiment.

But, on the whole, business is battling to see the positives of a constrained Ramaphosa win for South Africa and business, believes businessman, brand reputation advisor and political observer Solly Moeng. Moeng, who is CEO of DonValley Reputation Managers and a regular columnist for Fin24, bemoans the fact that as the horse-trading within the ruling party continues “business has to sit and wait, again”.

This does not bode well for resolving the impasse which has been holding back the economy and business confidence in recent years: a lack of confidence. “The ANC is in survival mode and that is their biggest fear right now, not appeasing markets and reassuring investors,” says Moeng. “This time is, again, going to be confusing for business. That is why there was a fist fight [during the ANC National Conference] when it came to the issue of land reform. There is a strong, and probably growing, populist element within ANC that wants a Zimbabwe-style approach and others who are urging caution, of course being mindful of the threat of the Economic Freedom Fighters (EFF) in the upcoming election.”

This highlights the bind in which Ramaphosa finds himself: straddling the very future of the ANC on the one hand and, on the other hand, the needs of the country and the economy.

“The ANC is being pulled to the left by the EFF and they are also struggling to remain the centre-left party they have always been,” says Moeng. “So, it’s going to be a tough balancing act for Ramaphosa.”

A moving chess game

Another challenge facing the new ANC president is the decision-by-committee nature of the party’s policies. While admirably democratic on paper, the current composition of a split NEC will effectively act as a brake to any proposed changes which threaten the other side. “The ANC has always been clear that it works as a collective, despite Zuma’s damage,” said Moeng. “Whoever is elected is supposed to implement collective ANC policies decided upon at the party’s policy conference and confirmed at its elective conference every five years. It was too naïve to assume that Ramaphosa could come in and turn things around on his own. The ANC is too broad. So Ramaphosa finds himself in a very, very tight spot.”

As Herman puts it: “This is a moving chess game.” And it is a game focused not on the long-term future of the country, but on the party.

Moeng agrees. “Over the next year the ANC will be turning its attention to persuading voters ahead of the 2019 general elections that they deserve to be given another chance.” While Moeng does not see that happening, a sidetracked and infighting ANC will do nothing to promote confidence in the country.

“I know many people looking for ways to move their businesses offshore and, in the absence of clear policies, that is going to continue to happen,” said Moeng. “Look at the impact of the Mining Charter. In the absence of clear and predictable policies, business will continue to avoid building on quicksand. The ANC needs to wake up to the fact that it needs clear strategies in place, so people can make long-term plans. In the current environment, business cannot make long-term plans. Sure, investors can keep dabbling in the short term, but that isn’t sustainable or long term in nature.”

This is hardly a happy place for business, but, in a distinctly South African twist Herman notes with irony that in this new hybrid ANC, with its mixture of business-friendly faces and pro-Zuma politicians, the ruling party may well be pulling a fast one on the corporate world as well as the market. “In electing Ramaphosa, the ANC has effectively done fronting for business, like business does for government with Black Economic Empowerment,” he observes.

This sort of game playing will do nothing to bring business leaders to the table, with Calland noting that “business leaders will only come to the table if they trust the government”. What may well continue, however, is great involvement by business leaders in social and civic affairs. “Big business has been hesitant and possibly cowardly in its involvement in politics, but there has been a mood swing since Nenegate… [and now] business has to show what it is they are doing to contribute to a transformed economy,” says Calland.

Ramaphosa will need all the help he can get from his former corporate stomping ground, as he faces an uphill battle to develop economic policy and regain investor confidence. “Ramaphosa has a small window of opportunity akin to the famous ‘100 days’ to prove that he is the catalyst for change needed in government,” said Herman. “If he stumbles at any time during this embryonic period, he’ll be seen as a token rather than the strong leader needed, and market sentiment will quickly turn against South Africa.”

Conversely, if business sees attempts to root out corruption and deliver greater policy certainty, then investor sentiment would ‘shoot through the roof’, predicts Herman. “This, in turn, would spark a positive snowball effect that could uplift South Africa’s economic growth and revitalise the overall business landscape.”

But this is no time for games, warns Moeng. “Right now the ANC’s reputation is in trouble and it has negatively impacted the country’s reputational fortunes. And reputation is more variable than Bitcoin. We live in a world where you can’t fool people, and South Africans are not fools.” Neither is business.

“...the downgrade in June 2018 will be inevitable...”

“...expect huge tax changes and hikes”

“This is hardly a happy place for business...”