Investors back GNU – for now

South African assets and the rand have rallied strongly since the Government of National Unity (GNU) formation at the beginning of June. 

However, this relief-driven rally may not last long as investors look for evidence of improved governance and greater urgency in implementing reforms. 

This is feedback from Adriaan Pask, the chief investment officer (CIO) at PSG Asset Management, who urged caution in thinking that South Africa’s turnaround would be quick. 

Pask explained that the rand/dollar exchange rate broadly reflects the outlook for South Africa and investor sentiment toward the country. 

The fact that it has held firm at around R18.30/dollar since the national elections in May and dipped below R18/dollar for the first time in more than a year in August 2024 is a vote of confidence from investors in the new government. 

A question for investors is whether this is another ‘Ramaphoria moment’ or if our optimism is justified this time around. 

There are some encouraging signs that the GNU injects fresh air into the national government in portfolios such as agriculture and Home Affairs.

However, the reality is that the benefits, or potential benefits of the GNU, will only become apparent over time as policy reforms are implemented. 

It is also important to consider how things might have turned out if the election had gone differently to fully appreciate the advantages we have seen so far.

While the rand has strengthened since the elections and the formation of the GNU, this improvement is largely attributed to a weakening dollar. 

Consequently, the real benefit for our currency has been limited, which likely accounts for the cautious commentary regarding whether this development is genuinely positive. 

Had there been a coalition between the ANC, the MK, and the EFF, we would likely have seen a much weaker rand, Pask said. 

Given other indicators, this could have led to further deterioration. For instance, more controversial reform proposals, such as the National Health Insurance (NHI) and prescribed assets, might have gained traction, dampening market sentiment.

Additionally, foreign relations might have suffered if a coalition government with left-wing parties had been formed. 

Instead, there has been some strengthening of our currency and a gradual return from foreign investors. 

In the first five months of 2024, South African equities and bonds experienced average monthly outflows of around R10 billion. Post-elections, there were inflows of R4.5 billion in June and R5.8 billion in July. 

This indicates that foreign investors may be starting to reassess their view of South Africa, contributing to rallies in both bonds and equities.

With our currency not only stable but slightly stronger and inflation remaining steady, the focus has shifted from potential interest rate hikes to the possibility of a rate cut in September. 

Upward revisions in GDP forecasts and positive assessments from major global banks also reflect an improving outlook. 

Despite these early wins, Pask said there is still considerable room for improvement. 

Given the rand’s current strength relative to the dollar’s weakness, there is potential for further appreciation. Bond yield spreads have declined, but the spread relative to US bonds remains substantial. 

Although global sentiment towards emerging markets remains weak, South Africa is now more attractive than it was a few months ago. 

Looking back, market exuberance following Cyril Ramaphosa’s election as president of the ANC in 2017 saw a similar move in South African assets, Allan Gray portfolio manager Thalia Petousis said in a research note.

Ramaphoria, as the period came to be known, saw the 20-year bond spread versus US Treasuries decline from 725 basis points (bps) to 560bps or roughly a 13% capital return over just three months.

“Currently, the 20-year spread is at 716bps versus US Treasuries, reflecting that South African bonds are, in fact, cheaper now than they were pre-Ramaphoria.”

This is largely due to South Africa’s significantly inflated debt load and more severe interest service burden.

Casting one’s eye one year forward from Ramaphoria to December 2018, yields were again wider, and the capital gain versus pre-Ramaphoria collapsed to just 3%, with the rand weaker alongside it.

“A lesson to be learned from this experience is that given the interwoven nature of the global economy and consumed goods, the path of interest rates can struggle to sustainably decline if global inflation misbehaves,” said Petousis.

“A more imperative takeaway from the Ramaphoria period is that political goodwill alone cannot change the path of our country.”

For this time to be different, South Africa needs capable leaders to execute their mandates effectively after many years of decline in key government departments.

Only the right mix of ingenuity and skill can improve South Africa’s growth prospects and ultimately reduce unemployment.

Some political parties have, for example, proposed ideas for revamping Home Affairs and resolving the ongoing tourist visa issues that frustrate sectors of the economy.

Strong leaders in the right roles in key departments could have a tangible impact, as we saw when Edward Kieswetter turned the SARS around after state capture had eroded its operational ability and institutional integrity.

“Only time will tell if we can see a similar rebuild take place on a grander scale as the GNU and newly minted ministers find their feet.”