An Insider’s Look at South Africa’s Turbulent Year Ahead

South Africa has snagged a spot as a “top emerging market for investors in 2017,” according to Investment News. Meanwhile, the country faces a pivotal year in politics as President Jacob Zuma is expected to step down as head of the ruling African National Congress (ANC) in December. The ANC recently suffered its worst election result since 1994, and Zuma continues to fight against multiple scandals. The race is already underway to succeed him, both as ANC president and most likely as president of the country when elections take place in 2019.

We caught up with Mike Davies, an Expert with OnFrontiers, to get his take on the pending leadership transition and its impact on the economic environment. An experienced political risk and sustainable investment analyst, Davies currently serves as Managing Director of Kigoda Consulting, an independent consultancy based in Cape Town.

Investment News concludes, “Some investors see President Jacob Zuma’s power waning, boosting the appeal of South African stocks and bonds, especially given that some say the country will probably avoid a debt downgrade.” Do you agree?

Yes and no. President Zuma’s power will wane as the December ANC national conference draws near. Zuma managed to avoid calls from senior ANC members to stand down in late 2016, but his weak leadership, the ongoing corruption allegations against him, and his close relationship with the powerful Gupta business family (which has been accused of wielding undue influence) have significantly diminished his standing in the ANC. On the other hand, Zuma and the ANC will increasingly be focused on internal political battles throughout 2017. Without the necessary leadership to support policy certainty, stimulate growth, and reduce political risk, a debt downgrade remains a real possibility.

How do you think the race to succeed Zuma as ANC president will play out?

With the ANC National Conference almost a year away (16-20 December 2017), there are still numerous scenarios in play. At least six ANC leaders have expressed interest in being the next ANC president (and most likely the next president of South Africa in 2019 despite the ANC’s relatively poor showing in the 2016 local elections). The frontrunners are Deputy President Cyril Ramaphosa and former African Union Commission Chair Nkosazana Dlamini-Zuma. Dlamini-Zuma (who also happens to be Jacob Zuma’s ex-wife) currently has the advantage, based on ANC membership numbers in the provinces likely to support her. However, neither frontrunner is universally popular within the ANC, and the stakes are high, especially in terms of access to state resources required for patronage. As a result, unless the party can settle on a unity candidate, such as ANC Treasurer General Zweli Mkhize, the party could see further splits ahead of the 2019 election.

Which early contender for ANC president do you think would be most favorable from an investor perspective if he/she were to win and why?

Cyril Ramaphosa is undeniably the investor favorite. Ramaphosa is a former unionist, but he left frontline politics in the late 1990s after Thabo Mbeki outmaneuvered him to become Nelson Mandela’s successor. Ramaphosa then had a successful career in business, where he built up stakes in companies ranging from McDonald’s to MTN, a mobile telecoms company. His opponents will try to attack Ramaphosa using his poorly-judged intervention in the August 2012 mining dispute at Lonmin’s Marikana mine, where 34 mineworkers were shot dead by police. However, Ramaphosa has demonstrated a solid understanding of the challenges facing South Africa, and, through his contribution as deputy chairman of the National Development Plan, shown a vision for how these issues should be addressed. After Zuma’s hesitant leadership, Ramaphosa’s would boost investor confidence even though the vagaries of ANC policymaking and the need to satisfy a broad range of interest groups would mean that his interventions would fall short of expectations.

What wildcard political issues might emerge in the next year that investors should keep an eye on?

In coming months, a rumored cabinet reshuffle has the potential to exacerbate political uncertainty. In December 2015, Zuma appointed unknown politician Des van Rooyen as Minister of Finance, before rapidly reversing his decision under extreme pressure from ANC and business leaders to appoint the trusted former finance minister, Pravin Gordhan. Gordhan has been an obstacle to those wanting unfettered access to the resources of treasury, and his position, along with other ministers who openly challenged Zuma in late 2016, is under threat. If Zuma miscalculates his reshuffle, he could find his own position at risk and even greater infighting in the ANC. There is also an outside chance that Zuma could mount his own challenge for a third term as ANC president if he feels a successor will not provide adequate protection for him against his corruption charges being reinstated.

How do you see South Africa evolving as an emerging market in the next five years?

While South Africa will remain an important emerging market and the most developed country in the sub-region, it is also facing a crucial five years in terms of its development. The ANC succession will play an important role in determining the trajectory. If the modernizers win, some of the more negative aspects of Zuma’s two terms as president can be reversed, confidence in independent institutions can be restored, and investor confidence will return. However, if there is a continuation of the patronage seen under Zuma, coupled with escalating attacks on the judiciary and other institutions established to act as a check on executive power, South Africa’s position as a leading emerging market will suffer.

Featured image was taken by Brian Burger.