South Africa

Investors bet against the rand as coalition uncertainty grows

Traders are betting on more rand losses as the African National Congress leadership sets out to address the pressing issue of coalition-building after an election result that went against decades of precedent.

The cost of hedging against declines in the South African rand over the next year climbed a third day to its highest level this year.

In the spot market, the currency was weaker, tripping over the R19 per dollar mark in intraday trade. It was at R18.98 per dollar as of 13:52 in Johannesburg.

Members of the ANC’s national executive committee gathered east of Johannesburg on Thursday, a day after a separate body overseeing the party’s day—to—day running said that the “best option” is to consider forming a government of national unity.

“Investors remain on edge, with many questions as to when the decisions will be announced,” said Robert Hoodless, co-head of FX and macro analysis at InTouch Capital.

“Running up to the vote, EM investors were keen to push the bull case. The result brings into question that advice and how inaccurate the assumptions were.”

The ANC failed to secure a parliamentary majority in the recent general election for the first time in 30 years, receiving only 40.2% of the vote.

A government of national unity would include parties such as the left-leaning Economic Freedom Fighters, and possibly, former President Jacob Zuma’s uMkhonto weSizwe Party.

The party executive’s decision on this will be critical for investors, who had been eyeing a tie up with the Democratic Alliance — which they viewed as the most business-friendly among potential partners.

South Africa’s sovereign-risk premium has risen faster than the average of African peers over the past month.

The extra yield that investors demand to own the nation’s dollar debt rather than Treasuries stands at 337 basis points, according to JPMorgan Chase & Co. data.

The longevity of a potential coalition deal “will at some stage be tested,” Hoodless said. “Serious disruption and dysfunction going forward remains a possibility.”

Smooth transition

Despite the anxiety, transition to a coalition from power held by a single liberation party could be smooth, based on precedent across the continent, said Peter C. Earle, Senior Economist at the American Institute for Economic Research.

“Where there have been strong democratic institutions, well-defined legal frameworks, and political inclusiveness, peaceful transitions of power have been more common,” Earle said.

The ANC, which dates back to 1912, may look for parallels in other parties which have peacefully transitioned to broader political interests.

That includes Zambia in 1991 when the United National Independence Party lost to the Movement for Multi-Party Democracy, ending 27 years of rule since independence, and in Kenya in 2002 when the Kenya African National Union lost to the National Rainbow Coalition after holding office for 39 post-independence years.

Senegal and Ghana also offer parallels.

Unlike some of those cases, the ANC will still retain much of its power in the future coalition. That may also distinguish it from countries that witnessed hostile power transfers in recent decades from Ivory Coast to Zimbabwe.

“In nations where liberation parties have faced ethnic tensions or severe economic problems in addition to enduring weaker legal and political institutions, political struggles have been more likely to become hostile.” Earle said.


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