Markets may see Zuma as weak now, but this won’t last - analyst

Cape Town – The markets will realise later this year that President Jacob Zuma is not as weak as they currently see him as a result of declining urban support of his African National Congress (ANC) in the local government elections.

This analysis published by Nomura emerging markets economist Peter Montalto on Thursday reveals a scenario where South Africa will experience a positive reception from markets for now, but will see a change of heart later this year. This will likely include a ratings downgrade in November and December.

“The market looks at this result as increasing the probability of Zumxit (where Zuma will resign or be recalled) this year, making a disorderly reshuffle impossible, securing a more investor-friendly outcome at the elective conference (increasing the chances for Cyril Ramaphosa) at the end of next year and constraining Zuma while in office over what he can do,” said Montalto.

However, Montalto said the market was “significantly overplaying things”.

LIVE UPDATES: Nelson Mandela Bay 99.9% complete

Markets will remain positive about SA until October

This follows election results – which have not been completely counted – that show the ANC’s support in Tshwane (Pretoria) and Johannesburg declining to a point where a coalition government is likely to unseat the ANC.

The ruling party has also conceded defeat in Nelson Mandela Bay (Port Elizabeth) to the Democratic Alliance (DA), which will likely need a coalition to govern.

The DA also retained Cape Town, which it took over in 2006, when it governed the city with other smaller parties in a coalition and then by itself after the 2011 elections.

READ: ANC results a cause for concern - Mthembu

Montalto said there probably won’t be significant negative shocks in South Africa in the coming days or even months to shift the market mind set from its positive stand-point.

“We see the market holding on to gains until the end-September NEC (ANC National Executive Council) meeting, when the market starts to understand that Zuma is not as weak as they believe,” he said.

Early results on Thursday that showed the ANC was losing grip on key metros - as well as the UK's Super Thursday - resulted in the rand jumping to its strongest levels against the dollar since October 2015.

FULL STORY: Rand at October 2015 levels as UK battles Brexit with rate cut

Ratings downgrade will still occur

Montalto said Zuma will now be pulled in both directions within the ANC’s two factions.

This means “there will be no leadership on structural reform and therefore (rating) downgrades will still occur on 25 November for Moody’s and 2 December for S&P and Fitch.

“However, we must concede that ratings agencies may decide to give a usual dollop of ‘benefit of the doubt’ after these election results and look for optimism and change.

“Moody’s is particularly susceptible for that. However, broadly we think the growth outlook and a lack of action by year-end will still mean downgrades will occur as our baseline,” he said.

READ: Election outcome won't influence rating agencies - analyst

Zuma weakened, but not enough to see an exit just yet

Montalto said that while Zuma has been weakened by this result, he has enough support on the NEC and in enough provinces to avoid an early elective conference that would be needed to remove him.

“We think all sides (for and against him) have already conceded they do not want to be recalling two sitting presidents in a row,” he said. “As such, we continue to see no Zumxit before January 2018.

“We think Zuma and his faction will now focus all their energy on the elective conference at the end of next year to get their preferred candidate elected ANC president,” he said.

“We think these results provide somewhat more of an uphill battle for the Zuma-faction to get Nkosazana Dlamini-Zuma elected (or possibly Baleka Mbete),” he said. “However, not an insurmountable one if the machine of tenderpreneurship can continue to turn and this will be the root of that faction’s power.”  

Policy watch ahead of 2019 elections

Montalto said the ANC’s policies will need to be watched closely in the run up to the national elections 2019, as they may use left-leaning policies to gain votes.

“We do not see the ANC going down a new route or shifting to the left in a meaningful new way, but at present there are ANC policies that are not implemented by government, such as a wealth tax, national minimum wage and a social wage (which includes the minimum wage and benefits), that we think will move forward alongside things like land reform,” he said.

“We need to watch policy very carefully – the direction is not only one way, net.

“Indeed, it would be extraordinary to suggest that there would be no change in policy,” he said. “It would be the only ruling party anywhere that would not attempt to secure future election victory through policy, in part at least.”

WATCH: How coalition governments work

- Find everything you need to know about the 2016 Local Government Elections at our News24 Elections site, including the latest news and detailed, interactive maps for how South Africa has voted over the past 3 elections, or download the app for iOS and Android.