SA has about a year to cash in on ‘Ramaphosa rally’, Citi analyst says
President Cyril Ramaphosa must quickly show international investors his government can implement reforms to take advantage of a weak dollar and growth in China, according to Citi’s head of emerging markets.
The crucial period starts with Wednesday’s annual budget and runs until elections, due in 2019, Citi’s David Lubin said.
The rand, bonds and stocks have climbed to record highs due to what analysts have dubbed the "Ramaphosa rally", a buoyant market mood that has taken hold since Ramaphosa was elected leader of the ANC in December and then president of SA.
During Ramaphosa’s maiden state of the nation address on Friday, a day after replacing scandal-plagued Jacob Zuma as president, the rand surged to a three-year best.
Lubin said in an interview late on Monday that while Ramaphosa was respected by international markets, moving fast on economic reforms was key to turning optimism into long term investment.
"There’s been a very dramatic reassessment of SA’s fundamentals in the last three weeks," Lubin said.
What the president chooses to tackle first and when he’s able to do that will become big questions.David Lubin, head of emerging markets, Citi
Once the dust settles after the budget, urgent implementation of fiscal and structural reforms was needed to retain investor support, he said.
"It’s not a straightforward thing to implement reforms in mining, education and the structure of corporate ownership and parastatals. What the president chooses to tackle first and when he’s able to do that will become big questions," Lubin said.
"Conditions to go into the international [bond] market are absolutely better than they were a year ago. SA is a member of an asset class that’s in very good shape, because growth in the Chinese economy is robust and the dollar is weakening."
With commodities globally priced in dollars, chief exports such as gold, platinum and coal earn SA higher revenues when the greenback depreciates, helping to close the country’s capital deficit.
In September, the Treasury issued a pair of dollar bonds in overseas capital markets worth $2.5bn, attracting more than double that in bids. In October, it said it would raise international borrowing, pushing total debt to R3.4-trillion in 2020. This is as it looks to plug a gaping budget deficit triggered by years of weak growth and bailouts of state firms, including South African Airways, which received R10bn in 2017.
Lubin said portfolio flows into SA would remain solid despite US bond yields rising by their most in years.
He said to attract more direct investment flows, SA needed policy changes as opposed to changes in the Cabinet.
Ramaphosa is expected to change his cabinet soon and appoint a new finance minister to replace Malusi Gigaba, hired in March 2017 by Zuma in a midnight reshuffle that triggered credit downgrades by all three major rating agencies.
"A lot depends on Wednesday. If SA delivers a budget that maintains confidence in its ability to stabilise debt, that would go a long way," Lubin said.
"Building up some credibility and buying some time in what remains a transition going into an election requires a high degree of credibility," he said, referring to general elections in 2019.