Phala Phala and The Financial Markets
Following the release of the Phala Phala Section 89 panel’s findings, President Cyril Ramaphosa is clearly under significant pressure to resign as president of South Africa (SA). While the president was initially going to address the nation on Thursday evening (1 December), this was cancelled as he is consulting with role players over his options. The reality is that the uncertainty that this event creates is negative for the country, and local financial markets have clearly and correctly expressed this view.
A possible resignation of the president has been a risk factor that investors have been aware of for some time. Unfortunately, following the adverse findings of the Phala Phala panel, it has played out faster and more negatively than expected. In the short term, SA-centric financial assets (the rand, bonds, and domestically focused equities) have seen their prices pummelled as they adjusted to this new reality of a possible Ramaphosa resignation. The events leave us with several questions, including succession plans if he does resign, the ability of the ANC’s radical economic transformation (RET) faction to reassert itself and the continuation of the policy of rebuilding SA. How this plays out will only become evident in the coming days and months.
SA is an emerging market and is not alone. We have seen multiple countries remove presidents under similar circumstances – Brazil immediately comes to mind. In many cases, we have seen that all was not lost and that those countries were able to recover.
Ours is to consider the impact on investments. Markets have sharply adjusted to this event, with asset prices dropping significantly. Domestic assets will trade at an increased risk premium for a while, and this new risk factor will remain top of mind for investors.
We are assessing what this all means for the outlook of SA assets and at what price the risks are adequately reflected. This is difficult in the current environment, and the market will remain on edge for each new item of information. Often, the knee-jerk reaction is the wrong one. We are therefore acting cautiously with an objective view of the available information. Our initial assessment is that the strong market reaction has already priced in much of this risk.
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