South Africa’s Election Facade Fiddle
South African stocks, up 25 percent on the MSCI Index through July, braced for ruling party ANC setbacks in local elections billed as a referendum on President Zuma’s economic management and personal troubles after a court ordered reimbursement of costly upgrades at his residence. The opposition Democratic Alliance, now headed by a charismatic black cleric, may shed its traditional image of white domination and promotion as firebrand Julius Malema challenges the President internally through his separate Freedom Fighters wing. He got 6 percent in the 2014 general elections and aims to double that figure in the current contests, where key cities could shift away from decades of post-independence loyalty. Ratings agencies signaled that a messy political outcome could dent the sovereign debt profile and investor confidence and hasten junk demotion, as the IMF predicts barely positive GDP growth this year. The central bank has been on hold with 7 percent inflation and the rand tipping toward the 15/dollar range. Commodity and financial shocks have damaged exports and consumption, with precious metals prices flat and agriculture suffering from drought, and household spending and services lackluster under borrowing constraints. In addition to the domestic election scramble, next-door Zimbabwe, where the MSCI Index fell 5 percent, may be in the end-game of Mugabe rule as military veterans marched against him after a general civil servant strike demanding back pay. The unprecedented unrest my represent lost security force support crucial to sustaining the regime as the 92-year old President has appeared increasingly frail and confused in recent appearances. Another crackdown would invite international condemnation and jeopardize tentative reconciliation efforts with the IMF, which after overseeing staff-monitored programs may be prepared to resume lending if arrears are covered. The country reportedly has arranged a $1 billion line from the African Export-Import Bank to reimburse the Fund and other Bretton Woods institutions, but critics charge it will likely be diverted to overcome a chronic dollar shortage. The former Finance Minister in the unity government suggests that accounts presented to outside official bodies are misleading and that the true fiscal deficit may be running at 15 percent of GDP. An initial scheme to develop bonds for hard currency liquidity and payments was rejected as unviable when hard-pressed banks in desperate need of recapitalization could not accept them.
Nigeria was at the bottom of the Sub-Sahara frontier pack with a 40 percent tumble, as it finally moved to a floating exchange rate and the official and parallel rates quickly fell to 300-400/dollar amid still limited access. The economy is in recession and inflation spurted above 15 percent, prompting a 200 basis point interest rate hike. The central budget deficit is 3.5 percent of GDP and states have been unable to cover costs and service debt. International reserves slipped toward $25 billion and even with modest oil price recovery, production remains stunted with aging pipelines and attacks from Niger Delta rebels. President Buhari has intensified the campaign against Boko Haram, but has yet to articulate a convincing anti-poverty strategy for the embattled North as Finance Minister Adeosan tries to tap World Bank and African Development Bank credit for fiscal and balance of payments backstops. Power sector investors may also seek rescue after tariff increases were revoked in a surprise court ruling casting doubt on the Buhari team’s self-described pragmatism and judgment.