Why South African investors should care about the Ramaphosa scandal

Cyril Ramaphosa, the president of South Africa, is thinking about stepping down after an advisory group determined that the "cash-in-sofa" controversy engulfing his administration may be cause for his impeachment.

Following the theft of $580,000 hidden under a sofa at a game farm owned by Ramaphosa, the panel, chaired by a former chief judge, determined the president may have broken some provisions of the constitution. Ramaphosa has spent most of the day in talks over the report, and the conclusions will be discussed by the National Executive Committee of the African National Congress.

Investors have been dumping South African assets while they wait for answers out of concern that his impending departure may stall reforms intended to boost economic development, stabilise state finances, and combat corruption.

The dollar-rand cross increased the most since South Africa shut down all but necessary services in March 2020 during its first Covid-19 blackout, rising as high as 4.4% to 17.9596.

The 10-year rand yield increased 91 basis points to 11.71%, the highest level in a single day since markets were rocked by former President Jacob Zuma's dismissal of Nhlanhla Nene as finance minister in December 2015.

Although the market is responding poorly, if Cyril Ramaphosa's position is so precarious that he's considering stepping down, things shouldn't be too awful for South African assets. The market despises political unpredictability and frequently chooses the known devil for the unknown.

"To put it mildly, Ramaphosa's reform programme has been lacklustre. There will undoubtedly be questions about whether another ANC candidate can launch that process, but Cyril Ramaphosa will likely need more time to meet the needs.

"This is taking place at a time when South Africa's finances have been doing better recently, but the market does not believe in the sustainability of this better fiscal narrative...

The main criticism is that elections will take place in a year and a half, and the news from the past 24 hours may translate into increased spending pressures whether the president is removed or stays in office. This would hurt the party's ratings and make it harder for the ANC to win the 2024 elections, and I believe the market will view this as increasing fiscal risk.

"The ruling party would have to provide a candidate, either the deputy president or a caretaker president if Ramaphosa offered to resign. We don't think Deputy President David Mabuza will be nominated for the forthcoming ANC leadership election, which will take place from December 16 to 20. Mabuza didn't obtain enough nominations.

Paul Mashatile, the party's acting secretary-general and treasurer-general, who has the most nominations right now for the deputy president position for the December elective conference, will probably be considered for the presidency, in our opinion.

According to our analysis of the markets, President Ramaphosa's early departure would be seen adversely since it will likely slow the progress he has achieved on institutional changes and power sector reforms.

Although Mr Mashatile has already stated that his party would prioritise the economy, we think it will take some time for the financial markets to warm up to him.

"Much more uncertainty than investors were anticipating is introduced by the report. Investors will mostly be interested in what happens next in parliament and at the elective conference. While both are pressing issues, I believe Ramaphosa will face the latter's greatest difficulty. Colin Coleman, formerly in charge of sub-Saharan Africa at Goldman Sachs

"This conclusion most definitely puts the December elective conference in the crosshairs and further jeopardises the chances of both ANC renewal and significant economic, social, and pro-democracy changes. The ANC's regressive factions have won this battle.

Even if these events give life to the criminal and corruption networks the president sought to combat, South African business will continue to be robust. In turn, it will provide those who want to see a new political alternative to the ANC emerge from the ashes before the national elections in 2024 oxygen.

"President Ramaphosa was seen as the leader of regeneration and optimism. His recent travels to the White House, COP27 in Egypt, the G-20, and Buckingham Palace allowed him to forge stronger bonds with international leaders while advancing trade and support for the shift to renewable energy sources.

"All these initiatives are at a stop because of the timing of a potential impeachment and the inauguration of a new ANC president."

We appear to have reached the end of the president's post-2017 contradictions path, and things will in some respects revert to type. Investors will need to prepare for what it will look like when the taps are reopened.

"Analysts and rating agencies failed to spot blatant corruption under the Zuma administration until it was there in front of them, and that cannot happen again. The fiscal policy won't suddenly go off a cliff, and reforms and the need to address energy and logistical issues won't go away; instead, they'll get noisier and more difficult. Other policy areas could experience less change.

"I don't believe there will be many changes. The medium-term budget policy statement that Finance Minister Enoch Godongwana released makes it very apparent where the course is headed. He has been quite explicit about where South Africa has to go.

"We are consolidating, working really hard to raise money from around the world for our transition, and collaborating with institutions to find a solution to our energy instability."