South Africa's rand slipped while the country's stocks and bonds came under pressure on Thursday after projections indicated the governing African National Congress (ANC) was likely to lose its parliamentary majority in this week's election.
As of 12:40 GMT, the South African rand traded at 18.5838 against the dollar, about 0.7% weaker than its previous close. The currency has declined around 2% since the start of the year.
On the Johannesburg Stock Exchange, the blue-chip Top-40 index dropped nearly 2%, compared to a 1.3% decline across broader emerging markets. Both local and international bonds also faced pressure.
The Council for Scientific and Industrial Research projected that the ANC would receive 42% of the national vote, while broadcaster eNCA estimated around 45%.
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As per a Reuters report last updated on 12:09 GMT, South Africa’s election commission has so far released results from just over 16% of polling stations, showing the ANC at 42.5%, the largest opposition party Democratic Alliance at 25.7%, and the radical leftist Economic Freedom Fighters at 8.5%.
If the final results mirror the early figures, the ANC would need to form a coalition with one or more other parties to govern, potentially leading to unprecedented political volatility in the coming weeks or months.
Early results indicated the ANC was likely to secure a vote share closer to the lower end of projections, "increasing the chances that it will need to rely on one of the larger opposition parties to form the next government”, as per a research note from Jason Tuvey, deputy chief emerging markets economist at Capital Economics. Reuters cited Tuvey as adding that the scenario could introduce "potentially more radical policy outcomes”.
South Africa's government bonds also felt the pressure. Yields on the domestic 10-year benchmark spiked to as high as 10.743% — levels last seen in late April — before pulling back to 10.655%, according to LSEG data.
Among international dollar bonds, longer-dated maturities fell nearly 1 cent in early trading to hit four-week lows before retracing some losses. By 0945 GMT, the 2052 bond traded at 86.852 cents, Tradeweb data showed.
The cost of insuring exposure to the country's debt rose, with five-year credit default swaps climbing by 3 basis points from Wednesday's close to 230 bps, the highest level in a month, according to data from S&P Global Market Intelligence.
The Dutch bank ING recently published a preview of the South African election, writing that the “ANC could lose its majority [...] if polls are to be believed”.
As for the vote’s effect on the South African rand, EM Sovereign Strategist James Wilson and Global Head of Markets Chris Turner wrote that the effect of the “external environment”, such as U.S. inflation data and trade figures with China, was no less important than the result of the election:
“The rand has been one of the top emerging market currency performers over the last six weeks. That may partially be due to the tick-up in ANC popularity in the polls – reducing the risk of a market-unfriendly coalition. A large part of that rand out-performance, however, will be down to the external environment. Here low FX volatility has favoured the relative high-yielders, like the rand, which offers a 3% real interest rate. Additionally, the rand has been enjoying some strong terms of trade support given the surge in the prices of South Africa's top exports such as gold and platinum.
We suspect a further decline in USD/ZAR will require some more good news from the external environment such as some softer US inflation data. It is not clear to us that USD/ZAR needs to trade substantially below 18.00 should the ANC do well enough in the election to minimise the risk of uncertain coalitions. At the same time, the rand is one of the currencies most highly correlated to the China growth story and to the renminbi. USD/CNY trading above 7.25 over the next week or so could well undermine any further gains in the rand.
In short, we doubt the local story will justify USD/ZAR sustaining a move under 18.00 – unless that is softer US data provides a lift to the whole emerging currency complex”.
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