South African Rand: Political risks cloud outlook – Commerzbank

Commerzbank’s Volkmar Baur highlights that South African local elections and coalition outcomes could affect national reform momentum, while the US decision to remove AGOA preferences from next year threatens key export sectors such as autos and agriculture. He concludes that constructive national cooperation and continued structural reforms are crucial, but near-term conditions for the Rand remain difficult.

Reform risks and export headwinds

"While votes are still being counted in the US, South Africans are heading to the polls today. Mayors and municipal councils are up for election across the country, with the city governments of Johannesburg, Cape Town and Durban likely to attract particular attention. Clear-cut election results are unlikely in most cases, meaning that the vote will probably be followed by coalition negotiations that could drag on for several weeks."

"From a capital-market perspective, the election is not entirely straightforward to interpret. A strong showing by the Democratic Alliance (DA) would certainly be welcomed by markets. However, if the DA were to perform so strongly that the African National Congress (ANC) felt threatened, the local elections could put pressure on the coalition at the national level."

"This, in turn, would be negative for reforms and the economic outlook. It will also be interesting to see what kind of coalitions the ANC is prepared to enter into if faced with a choice between the DA and the left-wing Economic Freedom Fighters (EFF) or uMkhonto weSizwe (MK). Should the more left-leaning factions within the ANC prevail, this too could put a strain on the coalition at the national level."

"The geopolitical backdrop underscores just how important further reforms remain. On Monday, the US announced that South Africa will no longer benefit from the African Growth and Opportunity Act (AGOA) from the beginning of next year."

"For the rand, it will therefore be all the more important that the coalition at the national level quickly resumes constructive cooperation after the local elections and continues to push ahead with structural reforms. For the time being, however, the environment for the ZAR remains challenging."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)