Election Watch: South Africa's election results limits the president's ability to bring about change

The re-election of Cyril Ramaphosa as South Africa's president brings hope of change from the Zuma years, but ruling party infighting, needed wide-ranging reforms and an unfavourable global economy are likely to reduce his ability to fight corruption and relaunch industrial output.

The ruling party's support continues to decline

There were few surprises in the 8 May general elections, in which South African voters elected their next National Assembly (NA) and provincial assemblies. The ruling African National Congress (ANC), in power since the end of apartheid in 1994, continues to be the largest party with 57.6 per cent of votes, slightly lower than the 60 per cent its strategists had hoped for, but better than what critics expected. 

   

Campaign poster for Cyril Ramaphosa and the ANC, Johannesburg The centre-right Democratic Alliance (DA) opposition party also got fewer votes than expected: 20.7 per cent. Somewhat disrupting the political panorama was the Marxist Economic Freedom Fighters (EFF) party, garnering 10.6 per cent. This was a clear improvement from the 2014 general elections, likely thanks to a more polished political discourse by its leader, Julius Malema, and growing grievances with the establishment parties ANC and the DA, who lost support in the townships and among middle-class black voters. Also read:Split Sao Toman parliament increases stability and political risks The main surprise was the advancement of the right-wing Freedom Front Plus (FFP), which is dominated by white and Afrikaner voters, getting 2.5 per cent of the vote. The black-consciousness party Black First Land First (BLF) party, which has grabbed many headlines over the past two years, performed much worse than some had hoped for, failing to gain even one seat.

   

 In the NA, the ANC retained its absolute majority with 249 seats out of 400, while the DA and the EFF, respectively, got 89 and 25 seats. Neither will be able to realistically challenge the ANC's policy programme, and are likely to instead mobilise their supporters in street protests and labour unrest, should Ramaphosa's campaign pledges not move fast enough, in their view. On the provincial level, the ANC and DA both lost votes compared to the 2014 general elections, but neither lost their control on the provincial governments; all provinces except for Western Cape remain firmly in the grip of the ANC and its junior partners. Nevertheless, the ANC lost over 11 per cent in KwaZulu-Natal, a traditional stronghold of former president Jacob Zuma, an indication of the ANC's growing schism.

What does this mean for investors?

International markets responded positively to Ramaphosa's win, continuing a trend that began after he replaced Jacob Zuma in February 2018. But their joy is likely to be short-lived due to the raft of challenges that Ramaphosa is facing. Foreign direct investment (FDI) increased to a five-year high in 2018, growing by over 400 per cent, according to figures from the South African Reserve Bank (SARB) the central bank released in March. However, the SARB also noted that FDI as a share of GDP reached its lowest point in 13 years in the third quarter of 2018. The central bank estimates that South Africa's economy will grow by 1.5 per cent in 2019 due to slow industrial recovery and a less supportive global trade environment which will remain affected by the US-China trade war. This is low for an emerging economy like South Africa, which needs to reignite its industrial activity and reduce unemployment.
FDI as a share of GDP reached its lowest point in 13 years in the third quarter of 2018
Furthermore, the surge in FDI last year is likely to be offset by South Africa's deteriorating competitiveness. This is reflected in the Global Competitive Index of the World Economic Forum and the World Bank's Ease of Doing Business report; South Africa has dropped from 44th to 67th place and 35th to 82nd place, respectively, since 2007-2008. In April, credit-rating agency Moody's Investors Service warned that South Africa could struggle to maintain its investment-grade rating if GDP growth continued to be as low. Moody's is the only rating agency left out of the big three that considers South Africa at investment grade.

Policy priorities and the ghost of Zuma

Stamping out endemic corruption, which 'captured' state institutions under Zuma's nine years in government, will be a priority in the coming year. Reconfiguring state-owned enterprises (SOEs), the power utility Eskom in particular, should be another. Yet, Ramaphosa's mandate and room to manoeuvre to do this successfully have shrunk with the ANC's dwindling support.
Ramaphosa has to decrease the number of members and their deputies on his cabinet, while bearing in mind the growing schism within the ANC
To reduce spending on salaries and other benefits, Ramaphosa has to decrease the number of members and their deputies on his cabinet, while bearing in mind the growing schism within the ANC, split between Zuma supporters and those favouring the promise of change under Ramaphosa. Some critics argue the cabinet could be cut in half from 36 ministers and 35 deputies. Ramaphosa's decision is not entirely independent, however, and will depend on the ANC integrity committee's list of party members it thinks should not represent the party in parliament. Adriaan Basson, editor-in-chief of South Africa's News24 website, claims the list excludes several high-ranking Ramaphosa supporters, including ANC Chairman Gwede Mantashe, in addition to several Zuma allies, such as Ace Magashule the former premier of Free State province who was ousted after violent protests against him over corruption allegations in 2018. The case of Magashule, who has denied corruption allegations against him, is a key example that should worry investors. Although it is clear that corruption became rampant under Zuma, rather than being limited to the top of the ANC leadership, the patronage networks of corruption appear to have spread to the provinces, including Free State, KwaZulu-Natal, and Mpumalanga. Most of the provinces remain in the control of the ANC, and some of the patronage networks developed under Zuma remain intact for the time being; they are likely to cause some headaches for Ramaphosa and the ANC in the coming five years. Much will depend on the outcomes of ongoing hearings into 'state capture'. Also read: Election Watch - DR Congo's political transition signals continuity The Commission of Inquiry into Allegations of State Capture headed by Deputy Chief Justice Raymond Mnyamezeli Mlungisi 'Ray' Zondo  or the Zondo commission began hearings in August 2018. In early 2019, the commission heard a series of explosive testimonials by high-ranking officials about systematic corruption within SOEs and organs of the state. For nine days in January 2019, Angelo Agrizzi the former chief operating officer at SOE Bosasa (now trading under African Global Operations; AGO) which provides services to government, including prison services meticulously exposed corrupt practices by what he alleged to be senior officials, the amounts paid, and the methods used to evade detection. He also admitted having benefited hugely from the same practices. Although this brings exciting reading to those who have followed the case, it is doubtful that even a fraction of those accused will be prosecuted in the coming year.

Cleaning up one's own house

Ramaphosa and his son were themselves implicated in the state capture proceedings after DA leader Mmusi Maimane in the NA pressured the president about a ZAR500,000 payment to his leadership campaign by Bosasa. This became even more problematic when Ramaphosa denied this, saying his son had received consultancy fees from then-Bosasa head Gavin Watson in 2017. After the DA in November 2018 pressured the president in parliament, Ramaphosa admitted the payment had been made to his 2017 leadership campaign as a donation that had been received without his knowledge, and pledged to pay back the money. This issue is likely to haunt Ramaphosa over the coming five years. Furthermore, what the slew of leaks and investigative reports exposing state capture since the Gupta Leaks in May 2017 have shown is that a lot of this corruption has also taken place in collusion with major multinational companies and their subsidiaries in-country. The compliance demands on such companies are likely to remain high in light of the revelations and allegations of the past two years.

Breaking up a monopoly

The second challenge facing Ramaphosa is breaking up Eskom, a badly governed SOE whose rampant corruption and massive debt over the past decade has contributed to its ailing infrastructure and poor performance. This was brought to the fore in February and March following the company's decision to implement load-shedding due to capacity gaps, and its inability to provide short-term liquidity to improve the supply of coal due to its high level of indebtedness, accounting for 8 per cent of GDP and over half of government-guaranteed debt in April; that is ZAR419 billion (USD31 billion). While the government is trying to improve electricity-generation capacity, Ramaphosa and his team will face stiff opposition from the Zuma-supporting faction of his party, increasing the likelihood of their attempts to break up the power utility being derailed over the next year. Yet, breaking up Eskom will be critical if South Africa is to reignite its export-led economy, which relies heavily on industrial output. However, the way in which Eskom will be divided will be critical to investor confidence over the next year; failing to break up the utility will likely have a negative impact, potentially prompting some divestment.

ASSESSMENT

As the fervour around the elections settles, those who have been encouraged by Ramaphosa's approach to government since taking office are likely to be disappointed. The ANC's reduced mandate and widening schism signals a potential split of the party over the next five years, between Zuma and Ramaphosa supporters. However, although the ANC's dominance over national politics remains unchallenged, it will face tougher opposition in Gauteng and KwaZulu-Natal provinces where the party's majorities are now nearing the 50 per cent barrier. Because of this, the ANC will need to make some compromises...