The prospect of South Africa’s first coalition government of the post-apartheid era is likely to keep markets jittery for months, but the weakened ANC party could soothe some nerves by seeking a deal with the pro-business Democratic Alliance, investors say.
South Africa’s currency and bonds fell as election results showed the African National Congress’s (ANC) tumbling to 40% with over 97% of polling stations counted – far short of a majority.
The ANC had been forecast to lose its majority with final results expected to be released on Sunday. But the scale of the losses has blown the door wide open for a myriad of political outcomes that could shape the economic and fiscal trajectory of Africa’s most industrialised nation for years to come.
“We are right in the area of most uncertainty in term of what the make-up of the government is going to be,” said Kieran Curtis at asset management firm abrdn in London.
“The ANC have been very, very seriously kicked.”
Markets were swift to react. The rand ZAR= has weakened 1.7% from pre-election levels, briefly touching a five week low on Friday.
International bonds lost as much as two cents, with some longer-dated maturities trading below or close to the 70 cents in the dollar mark below which debt is considered distressed.
And the cost of insuring exposure to South Africa’s international debt spiked to levels last seen in April – as did yields on domestic bonds.
Key now will be coalition talks, with investors trying to assess the implications of the various combinations.
Potential partners for the ANC are the centre-right Democratic Alliance (DA), the far-left Economic Freedom Fighters (EFF) party, or former President Jacob Zuma’s newly-formed uMkhonto weSizwe (MK) party – in second place and a surprise strong performer in the ballot.
“The DA obviously is the favourite choice for investors,” said Ray Jyan, London-based portfolio manager at Europe’s largest asset manager Amundi, adding an agreement on such a coalition could spark a rally in South African assets.
“The DA has proven to be very efficient in terms of execution of policies and in terms of anti-corruption as well … They (the ANC, President Cyril) Ramaphosa have a decent plan in terms of reform, the problem is always execution.”
COMBINATIONS