Political Risk Analysis - Elective Conference Scenario Analysis: Ramaphosa To Win, But Struggle With Reforms - FEB 2018

BMI View: Our core scenario is that Deputy President Cyril Ramaphosa will win the ruling ANC ' s December elective conference , becoming the next party president . We expect Ramaphosa's victory to be hotly contested , preventing him from securing the political mandate to push through many structural economic reforms in South Africa . In this first article of our two-part series on the upcoming elective conference, we lay out our core view and consider what a Ramaphosa victory will mean for South Africa's economic trajectory .

The governing African National Congress (ANC)'s December 16-20 elective conference will not be a game-changer for the South African economy. The conference will pit the pro- and anti-Zuma factions of the ruling party against each other in a vote to decide the next party president, with Deputy President Cyril Ramaphosa (from the anti-Zuma faction) facing off against Nkosazana Dlamini-Zuma (the pro-Zuma wing's pick). Also to be voted on at the conference are the rest of the key 'top six' posts (Deputy President, Secretary-General, Deputy Secretary-General, Treasurer-General, and Chairperson) as well as 80 members that make up the National Executive Committee, the ANC's top decision-making body.

In this article, the first of a two-part scenario analysis of the elective conference, we lay out our core view and examine the impact. While Ramaphosa looks poised to win, this will not guarantee much needed macroeconomic reform in the years ahead. Indeed, while the deputy president has presented himself as the more business-friendly candidate, divisive party politics are likely to remain in place long after the elective conference, undermining scope for significant macroeconomic reforms.

Core View: Ramaphosa Wins In A Closely Contested Election

In our core view, the deputy president clinches the role of party president, but in a hotly contested election. His narrow victory means he is able to enact only limited reforms. In this scenario, we would expect some near-term gains for financial market assets, and potentially even some uptick in investment, but structurally growth would remain subdued over a multi-year time horizon. Some of the most immediately damaging fiscal risks could be taken off the cards, most notably plans for a nuclear power plant. However, efforts to improve state-owned enterprise (SOE)s' fiscal management and governance would be gradual, leaving major contingent liabilities continuing to pose long-term risks to fiscal sustainability for South Africa.

How This Happens: The deputy president is currently well ahead in branch nominations, with decisive endorsements from Eastern Cape, Western Cape, Northern Cape and Gauteng. However, the race is likely to be tighter than suggested by the initial branch nominations. Indeed, Dlamini-Zuma will likely benefit from stronger support from within the ANC leadership structure and the party's various 'leagues' (representing women, youth and veterans, amongst others). The crucial swing province of Mpumalanga also appears to be up for grabs after around half of the branches abstained from backing either Ramaphosa or Dlamini-Zuma during the nominations process.

Ramaphosa Leading Branch Nominations, But Race For Delegates Will Tighten
South Africa - ANC Branch Nominations By Province (LHS) and Total (RHS)
Source: Local news sources, BMI

Implications: Foreign investors and markets would likely cheer a Ramaphosa victory in any form, though gains are already at least partially priced in to financial markets. In the months following his victory, the most marked change would likely be a gradual departure from policies that are perceived to be investor 'unfriendly'. In the past year, foreign business perception of South Africa has been undercut repeatedly by a ramping up of more populist rhetoric from the pro-Zuma camp and a series of policy miscalculations. This has included statements calling into question the mandate and independence of key institutions, like the central bank, as well as the introduction of stringent amendments to the Mining Charter to name just a few. Such policies would be less likely to be introduced under a Ramaphosa-led party.

We also believe that as party president Ramaphosa would be well-placed to oversee work toward structural reforms. After President Zuma has faced growing allegations of so-called 'state capture', we believe an early priority will likely be a corruption crackdown to re-establish investor faith. This may be more symbolic than substantive, at least initially, though such measures would likely prove popular in South Africa and with foreign investors. Putting in place a well-respected head of the national treasury, as well as clarifying mining regulation could also buoy sentiment. We could also see some measures put in place either to encourage investment into the economy more broadly, such as tax breaks (though this would need to be balanced by revenue raising measures elsewhere, suggesting the magnitude of exemptions would be small) or a paring back of red tape and easing the investment process.

However, we caution that divisive party politics have significantly stymied policymaking in recent quarters, and a hotly contested election is unlikely to give Ramaphosa the political capital he will need to push through economically painful or difficult reforms. Most importantly, it is not guaranteed that Zuma would immediately (or rapidly) leave office in this scenario. Indeed, officially Zuma is set to remain in place until the 2019 general election, and while we believe that the ANC will be keen to avoid two power centres, a situation where Ramaphosa wins but with a fairly tight margin could mean that ousting Zuma (either by force in a recall or through negotiations) takes some time. This would further stymie potential for near-term economic transformation. Popular discontent over sluggish economic growth and a deep-seeded network of alliances based on patronage and self-interest will further stymie progress.

Ultimately, in order to determine Ramaphosa's ability to pass reforms, we will be closely watching who takes the other top cabinet spots as well as who is selected to form the NEC. In this scenario, the reformists could potentially sweep the top six posts, though would be unlikely to get an overwhelming majority of the NEC positions. Ramaphosa would also have to contend with powerful provincial leaders such as Free State Premier Ace Magashule, who had previously aligned themselves closely with Zuma.