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Local elections crucial for SA, investors - economist

Cape Town - The August 3 local elections are crucial for South Africa and the risk narrative for investors, Peter Attard Montalto, emerging markets economist at Nomura, said on Thursday.

"We think investors need to watch the share of the national vote for the ANC and also the key municipalities and how they may fall into the opposition’s hands," said Montalto.

"We think, in general, investors are overestimating the electoral hit the ANC will have from, among others, Nkandla and Nenegate on support levels. We also think investors view the local elections too much through the lens of Jacob Zuma going or not. This ignores the logistical complications of removing a sitting ANC President."

Overall, Nomura sees the election results as probably having only a limited impact on asset prices immediately. A very weak outcome for the ANC (getting less than a 55% national vote share and losing three metros) would likely be viewed as a market positive, because of increasing in the market’s mind the chances of Zuma’s early removal.

A moderate outcome of a 55-58% national vote share with one or two metros lost would be fairly neutral to slightly positive in terms of market reaction - with the market still with a bias to seeing Zuma go early. At the same time, Nomura thinks a more than 58% outcome (with no or one metro lost, but not Johannesburg) would be market negative with a much faster realisation that Zuma is secure in his position.

"We think investors need to watch policy initiatives after the elections and also the politics. The key date will be the end-September ANC NEC meeting, when Zuma’s future and the outcome of the election will be discussed – we think he will pass the test, but a focus of expectations and then repricing of risk for the market," said Montalto.

"The post-election period to Christmas will also be closely watched for progress on promised structural reforms. Much will depend on President Zuma’s standing through that post-election introspection period on what he can achieve on this front."

In Montalto's view, investors should also consider that all factions within the ANC have come to some agreement and put conflict on ice to maximise the success of the ANC at the local elections.

"This will likely change after the elections, with the conflict coming to the surface again and with it headline risk for markets," said Montalto.

READ: SA on 'almost inevitable' path to junk - economist

Focus of the battle
 
The focus of the battle, in his view, is really on the metros.

"Major metropolitan areas that investors know well are in close contention. Equally, the result will directly affect the ANC's internal power dynamics between the tenderpreneur and anti-tenderpreneur factions and the succession struggle that is also occurring within the organisation," he explained.

"The 2016 local elections see a weakened president, as tenderpreneurship has become much more widely exposed, after Nkandla and its Constitutional Court case, after the Guptas’ involvement in politics became much more widely known and after Nenegate and the exposure of the exercise of arbitrary power."

Nomura only expects a moderate loss of national support for the ANC, falling to around 56.5%, almost all from urban areas. It further expects at least one new key metro to fall from ANC majority control, though Johannesburg looks somewhat safe for the ANC.

"Coalitions may be messy and unstable, however, with the EFF partnering with the DA – ANC minority governing should not be ruled out. We think this type of result will not meaningfully damage President Zuma, allowing him to exit eventually on his own terms in 2018," said Montalto.

"We take polling results with a large pinch of salt – investors should not simply read them as result predictors."

READ: Don't blame Zuma for all SA's problems - economist

Nomura thinks the DA is being overestimated in the polls, while the ANC is being underestimated.

"As such, while there is likely to be a meaningful step-up in voter support for the DA since the parliamentary elections, it will probably be more limited. Equally, the Johannesburg level of ANC support is quite static - with the DA taking vote share from smaller parties most likely - and in Tshwane it has declined after the recent violent unrest," said Montalto.

"The volatility in support for both parties in Nelson Mandela Bay also reflects the more closely fought election battle with significant time given by leading figures in both parties to that campaign. We note these metro polls do not reflect the much more secure level of ANC voter support in rural areas."

As such Nomura sees the ANC’s share of the vote falling to 56.5% from 62.0% in the last local elections. It expects the DA to gain, increasing to 27.0% from 23.9% previously, the EFF entering their first municipal elections with a solid, though contained 8.5%, and the IFP continuing to fall to 1.5%. Independent votes might reach 3% this time.

ALSO READ: Local elections will impact rating agencies


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