Investor alarm is rising over the battle to become the next leader of South Africa’s ruling African National Congress (ANC), observers have warned. The growing political tension is creating uncertainty over economic policy continuity when Thabo Mbeki stands down next year as required by the constitution, after serving his second term as president.
Next month’s party conference will elect a new ANC leader, and left-leaning former deputy president Jacob Zuma is likely to vie for support against Mbeki. Investors are concerned that the nation’s reputation for fiscal conservatism will be undermined if a Zuma presidency leads to a political lurch to the left.
“There will be a lot of concerns should Zuma become leader. He is very aggressive in pursuing social spending and may rack up state expenditure. This will spook many investors,” Nico Kelder, economist at Pretoria-based asset manager Efficient Group, told Emerging Markets.
The ANC meeting is in effect more important than the presidential elections in 2009, since the party’s dominance over the political landscape means that its chosen candidate is almost certain to be elected president. Although the country’s constitution bars Mbeki from running for a third term as national president, he is seeking to halt Zuma’s march to power by being re-elected as ANC leader, which would give him a mandate to choose the next presidential candidate.
Mbeki fired his deputy in 2005 after a corruption case was brought against Zuma, against the backdrop of a power struggle between them, reflecting deep party divisions over the president’s economic agenda. Zuma is allied with the trade union and communist wings of the party who have lost faith in the adminstration’s orthodox economic policies. They argue that this agenda has failed to deliver significant social and economic improvements for the black majority.
Kelder is concerned that Zuma may introduce inflexible labour policies and increase government inefficiency, undermining economic growth.
“Zuma is instinctively socialist and stands for state spending, issuing grants and state housing. He will probably strengthen labour laws and amend the Employment Equity Act, which will make it harder to sack black employees. All in all, I think he may undermine the business environment.”
But Ann Grant, former UK High Commissioner to South Africa urged a calmer response from investors, claiming that a Zuma presidency would not result in a strongly redistributionist programme with loose fiscal policies and higher corporate taxes.
She argued that this would conflict with the pro-business agenda of the “new generation of black capitalists”, who have benefited from the party’s liberal policies since 1994, and “are now powerful within the ANC”. Grant believes this group leaves Zuma little choice but to disappoint his grassroots supporters upholding instead the priorities of the party leadership.
“For all his talk about leftist dislocation and hatred of pro-business policies, Zuma is bound by the policy conference for the ANC executive in June that reiterated support for the government’s economic agenda,” she explains.
But even assuming continuity on liberal economic reforms, foreign investor confidence may still be damaged by a prolonged power struggle within the ANC. If Mbeki carries on as the ANC party head, this will fuel uncertainty about the eventual ANC presidential candidate for many months, making the nation vulnerable to swings in investor confidence. This would leave South Africa dangerously exposed, since equity portfolio investments, at $15 billion in 2006, almost entirely funded the current account deficit, which reached the highest for more than three decades last year at $16.28 billion, 6.5% of GDP.
Razia Khan, regional head of research for Africa at Standard Chartered, explained that South Africa’s sovereign risk profile is now changing, with domestic political factors now more likely to drive the fortunes of sub-Saharan Africa’s largest economy in the near-term. But she urged market participants not to polarize the political debate. “Investors often label someone in South Africa as left-wing or conservative, without realizing there is broad-based support for pro-business policies in the country.”
From Mbeki’s perspective, the ideal outcome would be to have a new president from the pragmatic and technocratic wing of the party, such as business executive Cyril Ramaphosa. But Grant warned investors: “Whoever becomes the next president, it is difficult to see anyone being as pro-business as Mbeki.”