South Africa's Election Offers Relief, But Not Enthusiasm

The good news is that this week’s elections should keep the economy on its current track.? That’s also the bad news.?

CAPE TOWN, South Africa – All emerging markets are risky so the trick for the seasoned investor is to identify when those risks are rising or falling.? Here in South Africa on Wednesday, voters look like they will nudge the risks lower by awarding the ruling African National Congress just enough parliamentary seats to keep its current economic program more or less on track.? Sadly, that also consigns the country to another five years of timid reforms and tepid growth.

It looks like a pretty good trade for the rest of this year, but the business environment still looks frustrating and precarious for anyone considering a long-term investment.

The country’s gorgeous second city offers a reasonable metaphor for the last three decades of political and economic transformation since the ANC swept into power to dismantle apartheid.? Robben Island, where Nelson Mandela spent 18 of his 27 years behind bars, is now a mundane tourist destination and icon of failed repression, with a stunning view of a mainland still struggling with poverty, corruption and shifting geopolitics.

The transformation remains astonishing since Mandela guided a government shift from minority white to majority black with an exceptional mix of cunning and wisdom. Perhaps the starkest sign of success is that South Africa mostly avoided the disasters that befell neighboring Zimbabwe where a similar change triggered violence, hyperinflation and dictatorship.

By contrast, 60 million South Africans can now speak their mind and travel where they wish. Elections are widely considered fair and covered by journalists free of government control. There is also a rudimentary safety net that makes payments to roughly half the population, and on May 15 incumbent President Cyril Ramaphosa signed a bill to expand access to better health care.? For all the angry and colorful politicking that has more than 70 parties on this week’s ballot, three-quarters of South Africans tell pollsters there is “more than unites us than keeps us apart.”

Amid this amazing progress, though, growth has lagged, infrastructure has crumbled, and plain old corruption has been rampant.? Since 2012, the economy has grown on average just 0.8% annually and narrowly avoided a recession last year as the South African Reserve Bank continued to battle an annual consumer price index that registered 5.2% last month.? Unemployment is a whopping 33% and has been grinding steadily higher since it registered 22% in 2008. ?The percentage of South Africans who believe “leaders cannot be trusted” has surged from 18% in 2003 to 79% last year.

The current market rally stems largely from relief that things won’t get worse, but South Africans face some difficult decisions before investors can commit money with enthusiasm that its long-term prospects will improve.

So, there’s little surprise that the ANC, which won 70 percent of the vote in 2005 and 58% just five years ago, may not secure an absolute majority for the first time. Support was so low just a few months ago, that there was mounting expectation it would be forced into a disjointed coalition with some of the party’s more extreme rivals.

The Democratic Alliance, the market-oriented opposition, has registered nearly 22% in most polls but has trouble growing beyond its traditional base of white and mixed-race voters.? A more dangerous challenge comes from the left, where the Economic Freedom Fighters (EFF) want to nationalize mining, banking and telecom industries with likely more than 10% of the vote. Almost as disruptive would be an alliance with uMkhonto weSizwe, which means “Spear of the Nation” and was named for the ANC’s former paramilitary wing and enjoys similar levels of support.? Founded by Jacob Zuma, the former president forced from office amid a corruption scandal and barred from holding a parliamentary seat, the party seems to be draining support from the ANC and EFF with an appeal to Zulu tribal interests.

But more recent polls show the ANC bouncing back polling near 45%, which would allow it to strike a deal with smaller parties in a parliamentary coalition that re-elects Ramaphosa as president and keeps most of its current program on track. For all the disillusionment with the ANC, the government has managed to deliver progress on infrastructure, reduce the number of power outages, and may even show a primary budget surplus amid surging gold and platinum prices.

South Africa’s stocks, bonds and currency have surged in an early rally, and surveys show investors are still bullish and adding to their positions. ?In addition to the improving domestic picture, South Africa also benefits from global enthusiasm for commodities and healthy carry trade flows drawn to 5-year government yields near 10%.?

But beyond this year, the ANC looks exhausted and even a coalition that it dominates does not bode well for the kinds of difficult reforms in governance the country needs to attract long-term investment in transportation, education and renewable energy.

Add to these domestic concerns the risks around South Africa’s geopolitical tilt as tensions rise.? The ANC’s leadership still carries warm memories of Soviet support for its struggle against apartheid and refuses to back sanctions against Russia when it invaded Ukraine.? Strong trade ties with China may imperil the renewal of its trade preferences when the U.S. Congress takes up the renewal of the African Growth and Opportunity Act next year.

The current market rally stems largely from relief that things won’t get worse, but South Africans face some difficult decisions before investors can commit money with enthusiasm that its long-term prospects will improve.

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