Domestic elections in South Africa have arrived amidst an already challenging time for the South African Rand. Having failed to hang on to gains associated with the liberalisation of travel and commerce following the latest wave of pandemic-induced restrictions, the Rand entered this week’s elections vulnerable to selling pressure. The moderation in commodity prices over the last week or two following a period of strong, almost daily, price rises has also undermined support for emerging market and commodity currencies across the board. Versus the Dollar, Euro and Pound, the Rand is approaching significant resistance levels having undergone a severe correction throughout the latter-half of October and into November. Against the Dollar and Pound, the move is particularly pronounced, leaving GBPZAR and USDZAR close to year-to-date highs.
It was immediately apparent following the vote on Monday that voter turnout was markedly low. Despite having lower salience than a general election, the municipal elections had frequently been presented as a referendum on the ruling ANC. The pandemic, critics of the incumbent party argue, has highlighted the insufficiency of the ANC as the ruling party in South Africa. Immediately, reports of low voter turnout created expectations of electoral underperformance for the ANC. This has subsequently been confirmed by the exit poll and the ongoing vote count suggesting that the incumbent party has secured less than 50% of the vote for the first time since 1994.
You may question why the underperformance of the ANC and low voter turnout could undermine the Rand, particularly if you share the opinion that critics of the incumbent party are swift to expose. The reason why markets have devalued Rand against its major peers whilst the result of the election unfolds is the propensity for political and in turn social risk in reaction to the vote. Due to the 27-year tenure of the ANC in South Africa, markets are wary of the potential for a turbulent rebalancing of power and less political cohesion in the critical months that follow for the local and indeed global economy. The risk presented by the elections has precluded the currency from reflecting fully any potential support it may have received from news of an $8.5bn receipt to tackle its reliance on coal during Cop26.
Discussion and Analysis by Charles Porter