SA Rand firms up on the back of ensuing political stability


South African assets are rebounding, fuelled by investor hopes that the country will emerge from the next 13 days of coalition talks with a market-friendly government.The rand surged as much as 1.6% on Monday, its biggest one-day gain since December 14 after the ruling ANC failed to secure a majority for the first time in 30 years.

The rand was at R18.55 to the dollar before 08:00 on Tuesday.

South Africa’s dollar bonds were among the top performers in a Bloomberg index of emerging and frontier sovereign Eurobonds, while the FTSE/JSE All Share index ended the day as the second-best performing equity gauge in dollar terms among the 92 indexes monitored by Bloomberg.

A new government must be sworn in by June 17, and the anticipated coalition might look quite different to what was previously forecast.

Before the election, many on Wall Street had priced in the ANC securing about 45% of the vote, allowing the party to form a coalition with a smaller party. However, the ANC secured 40.2% of the vote only, opening up several scenarios that investors had previously considered unlikely, including a potential alliance with the left-leaning Economic Freedom Fighters or the newly formed uMkhonto weSizwe party, which includes former president Jacob Zuma.
“Our perception is that the market views a potential coalition with the largest opposition party, the Democratic Alliance, as overall benign albeit fragile,” said Yvette Babb, a portfolio manager at William Blair Investment Management. South African assets were highly volatile in the first hours of trading on Monday, but ended the day on a more stable footing.

“A formal alliance with the DA would be most supportive and perhaps give rise to a rally in asset prices. However, we believe there may be an enduring rise in the South African risk premium given the increase in implementation risks,” Babb added.

Despite the setback at the polls, the ANC remains the country’s largest party. Finance Minister Enoch Godongwana on Monday said the ANC will not make reckless decisions in selecting a coalition partner, aiming to maintain investor confidence and economic policy continuity.

Current coalition talks involve potential alliances with the EFF, the MKP and the DA. The ANC ruled out a demand by the MKP that President Cyril Ramaphosa step down, and is considering a minority government or a “confidence and supply” agreement to maintain stability.

Citigroup expects the ANC to rule as a minority government, creating “parliamentary uncertainty and instability,” economist Gina Schoeman said in a note to clients. A pact with the DA would be welcomed by financial markets, as it could accelerate economic reforms and privatization initiatives, and is seen as a more likely scenario, Schoeman said.

South Africa’s sovereign-risk premium eased Monday after jumping the most since January by the close of trading Friday. The extra yield that investors demand to own the nation’s dollar debt rather than Treasuries stands at 319 basis points, according to JPMorgan Chase & Co. data.

“The higher risk premium that would arise as a result of a coalition between the ANC, EFF, or the MK Party is reason alone to not enter such a coalition,” said Schoeman, which sees a 15% probability of this outcome.

For Sebastien Barbe, head of emerging market research at Credit Agricole, the strong performance of the MKP adds to uncertainty for the rand. A coalition with the DA would be more favorable for the currency compared to one with the MKP or EFF, he said.

“The rand at current levels is not particularly stretched, and the carry is decent, so this may limit some possible depreciation pressure that would come from political uncertainty,” said Barbe. “But i would say the rand risk is the the downside in the short term.”

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