South Africa: Cyril rebound falls flat

It was the culmination of Cyril Ramaphosa’s long road to the presidency of South Africa.

For the first time since the election of Nelson Mandela 25 years ago, members of parliament from both the ruling African National Congress (ANC) and opposition parties were unified in nominating Ramaphosa in February 2018 as the fifth post-apartheid president of the country. The goodwill towards the new president in parliament was a reflection of optimism across the nation, which had seen divisions deepen and economic stagnation during the controversial presidency of his predecessor Jacob Zuma.

The markets also reacted positively, with the Johannesburg Stock Exchange surging by more than 3% and the rand hitting a three-year high against the dollar on the day he was elected president. The hope among South Africans was that Ramaphosa, a former trade unionist turned business tycoon, would revitalise the ailing economy, which had been growing by under 2% since 2014, and unite the country.

But the wave of optimism dubbed “Ramaphoria” was quickly replaced by malaise after the economy shrunk by 2.2% in the first three months of 2018, the biggest quarterly contraction since the economic downturn of 2008. The downturn was mostly a result of reduced output in the agricultural and mining sectors.

The rand also plunged against the dollar, falling by 9.5% quarter-on-quarter in the second quarter of the year. The drop was attributed to the weakness in South Africa’s economy, strengthening of the US dollar against most emerging market currencies and a rebalancing of the rand after the temporary gains seen in February.

“It’s a reminder that the real problems in South Africa’s economy are almost all structural,” says John Ashbourne, Africa economist at London-based Capital Economics. “President Zuma certainly didn’t help things with some of his policy and personal decisions, but realistically he wasn’t the cause of the weak growth the economy was experiencing.”

Meanwhile, South Africa’s current account deficit also widened to 4.8% of GDP in the first quarter of 2018, which was the largest shortfall in two years and up from 2.9% in the last quarter of 2017.

Despite President Ramaphosa unleashing envoys to travel the globe to drum up $500bn of investment over the next five years, foreign investors, who hold around half of the country’s fixed rate debt, ditched the South African bonds at the fastest rate on record in May due to the uncompetitive yields. The 10-year bond yield stood at around 9% in May, which is comparatively lower than 13% and 11% for the similarly credit-rated emerging markets of Turkey and Brazil, respectively.

In order to close the deficit during this period of low growth, more borrowing will be required but, because of the low returns associated with South African bonds, few investors will view the country as an attractive proposition unless yield rates are increased. However, this will make borrowing more expensive. 

The gloom surrounding the current state of the South African economy has affected business confidence, which was boosted following the nomination of Ramaphosa. However, a quick turnaround of the economy was always unlikely because of the country’s deep systemic issues, according to Ralph Mathekga, an independent analyst and author of Ramaphosa’s Turn: Can Cyril Save South Africa?

“It is still very early in Cyril’s reign and South Africans have to be a bit patient,” says Mathekga. “Multilaterals have been coming to the country calling for structural reforms, but these take time to implement. So, at the moment, all President Ramaphosa can do is deal with things that are in his control such as cleaning house at many of the state-owned enterprises by putting in place people with competency to run those organisations, and fight corruption.

“But he has one hand tied behind his back when it comes to fighting corruption because he can’t afford to lose support in areas such as the Northern Province and KwaZulu-Natal.” The political turmoil gripping the ANC threatens to derail the new president’s reign before it has properly begun.

Political obstacles

President Ramaphosa has an immense challenge keeping the ANC together as the party builds up to the 2019 general elections. He was forced to take the unprecedented step of placing North West province under central control and removing its premier, ardent Zuma supporter Supra Mahumapelo, following violent protests that swept across the region.

Meanwhile, the governing party’s largest region and Zuma’s home province KwaZulu-Natal is also split, with supporters of the former president pushing back against his multiple legal woes. Zuma is facing corruption charges linked to an arms deal that occurred before his presidency and he is also a subject of interest in an inquiry into claims of state looting. He denies all charges.

The shadow of the former president looms large over Ramaphosa’s short presidency, according to Ashbourne. “President Ramaphosa inherited a deeply divided party following the party elections that saw him emerge victorious over Nkosazana Dlamini-Zuma,” he says. “The toxicity between the two camps hasn’t been fully resolved so Ramaphosa can’t just make a radical break in policy from his predecessor without having to deal with significant pushback.    

“Where the president has had room for manoeuvre is with the personnel changes he has implemented such as replacing the board of Eskom, which has been received positively by the market.” Dlamini-Zuma is a politician in her own right and Zuma’s former wife.

While Ramaphosa’s anti-corruption drive has been welcomed by investors, the systemic challenges facing the economy, such as a large current account deficit, have caused the economy to stagnate and there is little he can do before the 2019 election. South Africans will need to give the president time to turn things around, but, as the political clouds darken, he may struggle to get a hearing. 

Taku Dzimwasha