South Africa: Doubts on economic course persist despite Cyril Ramaphosa's victory as ANC president
January 19, 2018
Financial markets rallied after Deputy President Cyril Ramaphosa was elected president of the African National Congress (ANC) at the party congress held on December 16–20. He will likely become the ruling ANC party’s presidential candidate in the 2019 general elections. Ramaphosa beat Nkosazana Dlamini-Zuma, who was endorsed by embattled President Jacob Zuma and favored deepening economic nationalism and implementing more populist measures. On the other hand, Ramaphosa campaigned to crack down on endemic graft and corruption, and to steer the economy back to a solid growth trajectory through market-friendly policies after years of economic mismanagement under President Zuma. Following the result, South African bond yields fell and the currency rallied. Credit rating agencies stayed put, although South Africa’s sovereign credit rating remains under review as doubts on Ramaphosa’s economic policies persist.
Ramaphosa pledged to tackle youth unemployment and rekindle growth in South Africa by pushing through deep-seated reforms to improve business confidence. He plans to lower the over 25% unemployment rate by introducing incentives for firms to hire young people and improve youth employment programs. The newly elected ANC President plans to strengthen the judicial branch to clamp down on graft and improve the credibility of the government. Improving the efficiency of state-owned companies and putting the country’s finances on a more sustainable track is also a top priority. He is hoping that these measures would restore confidence in the economy and incentivize greater investment in key areas sectors such as mining.
Ramaphosa’s policy goals face significant challenges, as he has inherited a divided party. Ramaphosa beat his opponent by a margin of 3.8%, and close affiliates to Zuma were elected in key posts, including half of the members in the ANC’s all-powerful national executive committee. This will likely hinder Ramaphosa’s institutional reform efforts and his pledge to pursue more market-friendly reforms. Similarly, many controversial economic policies were approved by the delegates in the conference, which puts pressure on Ramaphosa to include them into his electoral platform. This has generated uncertainty regarding the economic course he will follow.
Ramaphosa plans to include an existing proposal to provide free university tuition into his economic platform, which would have devastating effects in public accounts and could trigger a credit downgrade. He has not yet made an official statement on the approved proposal to nationalize the privately-owned Reserve Bank of South Africa, which has sparked fears that the Bank’s independence will be undermined. More concerningly, the conference approved a resolution on increasing black economic ownership through land expropriation without redistribution, even though a constitutional amendment is required first. This resolution could lead to unlawful expropriation and could deter investment and cripple economic activity in the private sector. Ramaphosa has called for a land reform but has not offered concrete details yet.
The ANC electoral conference did not clear up South Africa’s GDP outlook for the next few years. Ramaphosa will have to walk a tightrope between two different views within the ANC on how to steer the economy to rekindle faster growth. He will face severe challenges in implementing his reform agenda given his slim victory margin, and he will need to manage expectations on both factions to be able to govern.
Economist David Faulkner from HSBC commented on why Ramaphosa’s victory had limited effect on placating concerns on South Africa’s growth outlook:
“While Mr Ramaphosa’s win has reduced the downside political risk, much remains unresolved and our concern that as the initial optimism subsides, the scale of the structural problems he faces and the limited options he has at his disposal will come ever more clearly into focus.”
South Africa GDP Forecast
FocusEconomics panelists and the South African Reserve Bank have upwardly revised their forecasts following Cyril Ramaphosa’s victory. The Central Bank now forecasts the economy growing 1.4% (previous forecast: +1.2%) in 2018 and 1.6% (previous forecast: 1.5%) in 2019. FocusEconomics Consensus Forecast panelists, meanwhile, expect the economy to expand 1.5% in 2018, which is up0.2 percentage points from last month’s estimate. The panel projects growth to picking up to 1.7% in 2019.