South African Markets Rally as Cabinet Announcement Eases Fears

Colleen Goko
·3 min read

(Bloomberg) -- A broad rally in South African markets signaled investor relief after President Cyril Ramaphosa ended weeks of uncertainty by announcing a new cabinet that he said would prioritize economic growth.

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In a televised address late Sunday, Ramaphosa allocated some key ministerial posts to business-friendly opposition politicians while retaining close ally Enoch Godongwana as finance minister. That’s seen as a sign that fiscal policy aimed at curbing debt would remain on track.

The announcement came a month after the African National Congress lost its parliamentary majority in May 29 elections, forcing it to invite its rivals to join a broad coalition government. Almost a dozen parties accepted the offer, though the two main left-wing parties were left out in the cold.

The presence of opposition parties may help the new administration tackle state ineptitude, power shortages and logistics snarl-ups that have curtailed economic growth and investment. Gross domestic product has expanded by less than 1% a year on average over the past decade — well below what’s needed to maintain living standards for the growing population.

“The rand rallied post the announcement as investors have been sitting on the sidelines waiting to see what the new cabinet looks like,” said Matete Thulare, the Johannesburg-based head of foreign-exchange execution at FirstRand Bank Ltd. “The new cabinet will hit the ground running as they need to accelerate economic reforms so as to get the ailing economy back on track.”

The South African currency advanced 1% to 18.0171 per dollar as of 10:50 a.m. in Johannesburg. The yield on benchmark 2035 government bonds fell 17 basis points to 11.23%, heading toward an April 2023 low.

In other market reaction:

  • The benchmark FTSE/JSE Africa All Share Index of stocks climbed for s second day, closing in on a year-to-date high

  • The cost of insuring South Africa’s debt for five years using credit-default swaps fell to the lowest since Jan. 1

  • The premium investors demand to hold South Africa’s dollar bonds rather than US Treasuries narrowed to the lowest since Dec. 14

Analysts at Rand Merchant Bank said Ramaphosa’s retention of Godongwana as finance minister was particularly significant for domestic markets. The reappointment signals a continuation of a prudent fiscal approach and adherence to projections outlined in the February budget and medium-term expenditure framework, they said.

Momentum indicators suggest further rand appreciation is likely this week, the analysts added, predicting the rand would move toward 17.90 per dollar.

Ramaphosa also included members of the Democratic Alliance — considered business-friendly by investors — in his cabinet, with leader John Steenhuisen named agriculture minister.

Politics have whipsawed the rand over the past month.

The currency weakened toward 19 when it became clear that the ANC would lose more support than initially expected in the May 29 vote. It then rallied below 18 in mid-June after a government of national unity was announced, which excluded left-learning parties whose policy proposals had made investors nervous. The rand then began to weaken again as investors awaited news on which parties would secure positions in the cabinet.

“Given the multiparty arrangement in the new government, we see some upside potential for reforms, which could accelerate given greater accountability/oversight,” Goldman Sachs International Inc. economist Andrew Matheny said in a note on Sunday. “That said, the coalition might ultimately prove fragile.”

--With assistance from Robert Brand.

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