Nomuras View on SA: Road to 2014 Elections

Issued By: Peter Attard Montalto (Nomura)

The fifth South African general election under universal suffrage since the end of apartheid is probably around nine months’ away – likely to occur in early May or possibly the last two weeks of April 2014.

The election is unusually important (vs 2009 at least), coming at the juncture of a crucial long-run story in South Africa: how the ANC reacts in policy and political terms to a continued loss of electoral support which means it risks losing power in 2019. Add to that, three new parties which should make a mark to varying degrees.

Here is a summary of our 2014 elections views, which we expand on in Q&A form below (these are modal forecast voter % numbers; more meaningful ranges are given below).

  • The ANC should drop from 65.9% in 2009 down to around 56.2% as voters turn principally to the DA, EFF and Agang. Demographics are nibbling away at the “liberation debt” owed to the ANC combined with increasing dissatisfaction with delivery and new choices of party.
  • As such, we think the ANC will still be unable to alter the constitution, even with a coalition with EFF and IFP (now the ANC is three seats short which we have always assumed they could garner from smaller parties or IFP).
  • The ANC should therefore be able to return Jacob Zuma as President in the indirect vote that happens in the National Assembly.
  • We would put a probability of only 15% on the ANC dropping below 50% in which case it would form a coalition. The DA, COPE and Agang would never enter such a coalition, in our view.
  • We expect the DA to rise from 16.7% to 27.0%. The absorption of the Independent Democrats, further collapse of COPE and sidelining of more marginal parties should all help, combined with the DA’s proven record of service delivery in the Western Cape. We see a 40% chance that the DA takes Gauteng province in a coalition.
  • Agang should do well for such a new party, but think it will get only around 6% of the vote. It will likely attract a variety of different groups but be unable to connect the dots despite a strong manifesto.
  • Economic Freedom Fighters (EFF) may take a significant chunk of the unemployed and township youth vote, but turnout of that group will likely not be in its favour. We also shouldn’t overestimate the party’s support. We see it getting 4% of the vote which would give it 16 seats in the National Assembly (including Julius Malema, assuming he is not imprisoned for tax fraud).
  • Of the smaller parties we see new party WASP (Workers and Socialist Party) possibly getting enough votes for one top-up seat, but garnering support beyond miners will be difficult and even then it will face competition from EFF.
  • We expect COPE to continue to die a slow death as it has been invisible in the political process since the last election and given its ongoing lack of clear management and internal court cases that are ongoing. We see it dropping from 7.4% to 2.0%
  • Other small parties, despite the more united opposition in the National Assembly in the past two years, should continue to be squeezed out by the larger and new parties and we see them dropping from 2.9% to 1.1%.
  • We expect turnout to be slightly up on last time’s 76% thanks to the three new entrants and arrival of “born-free-er” voters.
  • We do not expect any violence or disorder in the electoral process during the vote. However, we do expect some low level violence against opposition party meetings as occurred in 2009, before the vote. However, the reaction of the ANC to losing an expected 6.5pp of the vote and around 42 seats after the vote remains uncertain. We would expect it to be more obstructionist than anything else.
  • We expect no immediate, fundamental, policy reaction after the election to the likely loss of vote share, save for an increase in taxes to increase spending. However, we expect the ANC to initially try much greater state involvement in the economy before ultimately (around the 2019 election) realising that is never going to work and attempting a more free market solution for the economy.
  • Before the election, even starting now, we expect the ANC’s long-running internal fear (driven by private polling numbers) over its loss of support to drive a degree of populism in the campaign, but we would expect this to be only rhetorical, no actual policy shift. We think the threat of it becoming even more difficult to change the constitution, and given the Mangaung conference some policies do require change – may lead to some hurried alterations being initiated by year-end.

It should be noted that, given a total lack of publicly available detailed polling data at this stage, the margin for error round these forecasts is clearly quite large.

Below is our current baseline which we will elaborate on. As polling data emerge nearer the election we will continually refine our view.

 
Fig. 1: Election outlook
Source: Nomura, IEC Note: “-“ indicates the party did not or is not competing in the election. These are back-of-the-envelope early thoughts of roughly where we place our expectations.

Now for some Q&A:

The election is so far away – what issues should we be concerned with right now?

Under the Fed-tapering world from September the market will be increasing thinking about credit differentiation, the risks in a country’s outlook and how different countries are responding to the challenges of boosting growth and consolidating deficits. We think the ANC’s rhetoric (and associated headline risk) as well as its impact on the MTBPS and budget, not to mention other policy areas, will be of concern to the market during this period and potentially market moving.

The appearance of new parties that will likely take support from both the far-left of the ANC and the centre/centre-left (EFF and Agang respectively), not to mention the rising popularity of the DA, should create an atmosphere of public policy and political debate at this election that was not present at the last election in 2009 or even at the 2011 municipal election when COPE did not provide a credible challenge (we know with hindsight now).

We believe that there is real concern in the ANC and that its internal polling data are focusing on the vote share loss it can suffer. We believe this concern will lead to an aggressive campaign but won’t fundamentally affect actual policy yet. Focusing on issues like mining rights and state involvement in the economy combined with a vocal campaign from Julius Malema and worsening relations between the DA and ANC should make for some volatility.

What will the ANC and DA campaign message be?

We think the ANC campaign will be kept simple if multi-pronged: 1) to the youth – your parents voted for the ANC so you owe the same, 2) the liberation debt is still to be repaid and no other party can claim any involvement in the struggle [this is false, clearly], 3) only the ANC will deliver redistribution of income, services and ownership to the black majority (and similar racial messages), 4) the ANC will deliver growth, infrastructure and jobs [with exaggerated promises], and 5) apartheid and the global economic crisis are to blame for not making sufficient progress on delivery in the last 20 years not the ANC.

The DA campaign will be even simpler in our view: 1) DA is better at running things, look at the Western Cape and how DA councillors have pushed for service delivery on the ground elsewhere, 2) the ANC has had long enough to change the country and it has not worked because of its ideology and corrupting tendencies so time to try out the alternative, and 3) only the DA can deliver true non-racialism.

What policy or rhetoric changes might occur as a result?

We are particularly worried about the legislative passage of the current live issues in the context of the election campaign:

  • New 2013 amendments to the Mineral and Petroleum Resources Act

o  There is currently great deal of concern in the mining sector about the provisions of these amendments giving the Minister increasingly free rein over structural issues in the sector as well as the provisions for strategic minerals (coal in particular). Further interventionist provisions on the MPRA may be promised, however, within the context of the Mangaung resolutions and EFF policy initiatives. Rhetoric here will be key.

  • Business Licensing Act

o  This (in our view, extremely poor and misguided) piece of interventionist draft legislation, which requires any business however small to get a permit to operate, though currently withdrawn for further consideration may resurface as part of the campaign as the ANC tries to show its developmental state credentials.

  • BBBEE changes

o  While the current debate focuses on how to achieve more genuine redistribution and the failure of the current BBBEE legislation, this could morph into more politicised discussion of tax and forced ownership transfers in the context of mining and land in particular.

  • Land reform

o  Land reform is certainly the topic of 2013, and while the ANC’s current more aggressive stance is broadly welcomed, the NDP and Mangaung actually take things further, especially under the reallocation of farm land, so this will have to be watched closely.

  • Constitutional changes proposed by the ANC at Mangaung (especially regarding the judiciary)

o  Given we suspect the ANC will lose any ability to gather coalition to reform the constitution after the election, we worry that it is possible that it may use pork-barrelling now to gain support from the IFP and smaller parties to make controversial changes outlined at Mangaung, later this year or early next year before the election to ensure they are out of the way. However the outcry this would cause in the media and as part of the campaign may well put them off doing this.

  • NDP and related growth measures

o  The ANC is in no position, both itself ideologically and in the tri-partite alliance, to fundamentally shift away from interventionist policies or to pursue issues like reforming labour laws. However, we think it may implement a raft of possibly more interventionist measures while paying lip-service to NDP without any real leadership on the issue. A recently announced, confusing, additional Presidential growth commission also fits this mould, and we view that as a pre-election gimmick to also keep investors onside.

  • The MTBPS and Budget

o  We do not believe the two budgets will be unduly affected by the election. Expenditure freezes that occurred at the last two elections, however, are probably unsustainable, but we still think the pace of fiscal consolidation would stall further anyway even without the election given the natural pressures within the government. Municipal and provincial budgets, however, are likely to be far more political.

What is going on with three new parties?

Several high profile new parties are already registered for the election, and they may take a significant proportion of the vote at their first election. We see Agang, led by Mamphela Ramphele, as the key one for investors. It offers an alternative to ANC policy, taking an almost “zero-base policy” approach, starting again, and is able to operate outside the historical constraints of the ANC/DA nexus. We think Agang may do quite well, and win around 6.0% vote share, but its targeting of a number of disparate groups of voters should limit its upside at least to start with at this election. Agang is yet to publish a full manifesto but we think it resides between the centre-left and centre-right.

The Economic Freedom Fighters, led by firebrand former ANCYL head Julius Malema, should do well among young people and the unemployed and is polling around 26% support from the youth segment of the electorate. We think this should equate to around 4% share overall accounting for the usual lower turnout for this segment. The key issue will be whether Mr Malema can hold his party together and whether he has the logistics to run a campaign and form a list of candidates. His own legal difficulties are probably the biggest difficulty. We suspect markets and media will overegg his importance in the campaign (vs Dr Ramphele who we think should do better than him), and his policy slate will likely get more attention than it deserves. Categorising EFFs policy platform is difficult but we would describe it simply as anarco-marxist, with aggressive uncompensated land reform, removal of borders, wholesale nationalisation and business seizures and wealth taxes just a taste of the policies. This crowd ran the ANCYL into the ground financially too so the risk is there that they do the same in EFF, however there are financial backers behind them to provide a backstop.

Finally, the Workers and Socialists party is a new party to come out of the tragedy at Marikana. It is far-left policy-wise, but will fail in our view to capture any real vote share beyond a small group of more aggressive mine workers. Some analysts think AMCU could align with them, but we disagree given political alliance is a total antithesis to the party (given COSATU/ANC).

Is there any influence from the new leadership team under Zuma after Mangaung in the runup to the election?

We still think it is far too early to make a firm call on the nature of the government after the election, though we see Cyril Ramaphosa taking a strong leadership role over the long run. He is also likely to be the face of reason and calm for middle-class voters of Johannesburg and Cape Town and investors, while Jacob Zuma and others take a more robust message out around the country and to the townships. Mr Zuma is fundamentally damaged goods given the scandals surrounding him since the last election. However, we don’t take quite such a pessimistic view on how much of an electoral liability he is as some others do. In our mind he is no different than he was when he was first elected as head of the ANC. Indeed, some issues around corruption were more alive then than they are now.

What demographic issues are there at this election?

The middle-aged population is the key area of growth since the last election in terms of age buckets of the electorate. However, the most important trend is that of the “born-free-ers” – those who never knew apartheid. While the proportion of youth (under 25s) at this election will be very slightly down on the last election, this will be the first ever national election in which those born since 1994 will be able to vote, making up some 5.7% of the population. However, a wider definition we like to use of anyone who was under the age of 15 during apartheid (BFs) gives a broader flavour, and is increasing markedly now to some 30.7% of the electorate from 22.6% last time.

We will have to see more polling data to truly understand the views of these groupings. While large numbers of those who have been failed by the ANC back the EFF, this group includes a majority of university graduates since wider admission after apartheid. We think these new black middle-class are most likely to vote for DA or Agang, unlike their parents who are more likely to vote for the ANC.

The most difficult part of this demographic segment is its traditionally low turnout. However, with a generation of much more media- and tech-engaged youth, turnout this time could be higher.

The demographics, however, suggest to us that the “liberation debt” argument for the ANC is still not quite dead at this election. By 2019, however, some 42% of the electorate under our forecast will be part of our wider definition of “BFs”. That is partly why we see that as the real crunch election and not this one for the ANC potentially losing power.

What should the market watch and what are the market implications?

The market is already pricing in a very nebulous negativity around South Africa, and hence ZAR is pegged in a wide band around 10.0. We think as the campaign proper gets under way – first subtly as we move through the next few months, and then more openly into next year – we will see increased volatility and headline risk. However, we don’t think the election poses a risk of further ZAR repricing to 11.0 unless there is a more dramatic policy shift. Indeed, perversely as polling data start to emerge the reduction in support may cause ZAR to strengthen as investors see a stronger opposition. This would be the wrong reaction, in our view, given the uncertainty about how the ANC might react in policy and non-policy terms to such an event after the election. We would expect it initially to shift to the left, before finally realising the real way to boost growth is not through state intervention but through liberalisation as the 2019 election approaches. That will be the real crunch, in our view.

For The Complete Document: Country Views:South Africa: Nine months to the election – Q&A

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