Coalition
This briefing is about South Africa and the Rand, which frequently proves to be one of the more divisive subjects within our roster of currencies. In particular, with the election looming, this will be about South African governance. Not from a political or human perspective about what may be the best long term outcome for the nation but of the market risk that is destabilising and influencing the Rand as the event draws closer. Voter share of the ruling African National Congress party has been dwindling. Having ruled in South Africa for 30 years, Mandela’s party now looks like it will have to share power with another party in a coalition.
The election has and will continue to be fraught with emotive political debate. Unemployment stands at 32% and there is little to be said in the way of growth. Fortunately for the economy, inflation appears to be coming under control. Unfortunately for the Rand, that will continue to invite markets to speculate over rate cuts that will likely remove its candidacy from any form of carry trade. Polls in South Africa mostly show the ANC failing to hold onto a parliamentary majority next month.
With the election due to take place on 29 May, the market is speculating about potential coalition partners for the ANC. The most concerning coalition partners from a market perspective are the EFF and the uMkhonto we Sizwe party. The latter is the new party backed by former President Jacob Zuma. Based upon the legacy of the disgraced president it is easy to see why this coalition would upset local financial markets. The EFF’s economic policies, including the nationalisation of private assets, would also invite significant turbulence should it manifest as a plausible reality. Surprisingly, despite its track record on growth, unemployment, productivity and economic management, a resurgence in ANC voter share might just be the ticket to a short term recovery in the Rand.
Discussion and Analysis by Charles Porter
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