(Bloomberg) — Investors are bracing for more turmoil in South Africa’s financial markets after a general election failed to produce a clear winner and left the outcome of coalition talks and future policy direction highly uncertain.
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The rand's volatility over the next month rose sharply on Monday, briefly approaching its September high. By 11:53 a.m. in Johannesburg, the rand was up 0.3% to trade at 18.7375 per U.S. dollar. If that trend continues, it will be the rand's first gain in four days. Benchmark local-currency bond yields fell 9 basis points to 12.1%, while stocks snapped a four-day slide and posted their biggest one-day gain in nearly a month.
The African National Congress fell short of a parliamentary majority for the first time since it came to power under Nelson Mandela in 1994, as its supporters expressed anger over poverty, unemployment, and crime by boycotting the vote or backing rival candidates. The party will have to rely on at least one other major party to stay in power, and its choice of partner will determine the country's direction for the next five years and affect people, businesses, and investors.
The ANC won 40.2% of the vote in the May 29 vote. The centrist Democratic Alliance won 21.8%, former president Jacob Zuma's new party, Umkhonto weSizwe Party (MKP), won 14.6%, and the left-wing Economic Freedom Fighters won 9.5%.
The latter two parties, both ANC splinter groups that support increased state spending and nationalization of mines and the central bank, have weighed on South Africa's fortunes. The possibility that they could join power and demand populist policy changes is weighing on South Africa's fortunes.
“Investors should be very worried because South Africa is at a crossroads,” said Anne Fruhauf, managing director at risk adviser Teneo. “At this point, any coalition outcome is pretty much a given.”
Since voting began on May 29, the rand has fallen 2.6% against the dollar as the magnitude of the ANC's defeat became clear. During this time the cost of insuring the national debt has risen by about 19 basis points to 242.3 basis points.
The ANC will not be “reckless” in its choice of coalition partner, Finance Minister Enoch Godongwana told Bloomberg in an interview. “The ANC remains the largest party and economic policy remains ours, so there is no risk to stability or threat to investor confidence.”
A coalition with the Democratic Alliance would be the most positive for markets, but “getting there won't be easy and it will certainly put pressure on ANC unity,” said Mark Borndo, senior credit research analyst at REDD Intelligence. “Uncertainty will weigh on the rand and I think it could well break through the record level of 20 rand to the dollar.”
Leaders of the main parties met over the weekend to hammer out a way forward but serious negotiations have not yet begun and it is expected to take several days to reach an agreement. The National Assembly must meet to choose a president within 14 days of the announcement of the results, but by law can hold an extension if the candidates cannot agree.
All the major parties have said they are open to a deal, but Zuma's MKP has made any alliance with the ANC conditional on President Cyril Ramaphosa stepping down, a condition ANC secretary-general Fikile Mbalula has said the ANC would never accept.
Ramaphosa's allies support a coalition with the DA, but people familiar with the matter say that option would face opposition within the ANC. The party is considering various options to work with rivals and could appoint a finance minister from outside the party, other sources said. The president can appoint two non-MPs to cabinet.
Read more: South Africa's ANC attacks rivals after election humiliation
“Opposition parties like the DA, MK and EFF will be trying hard to get an agreement done, but the internal dynamics of the ANC will be just as important,” Fruhauf said. “This could be a big internal battle.”
The DA agreed on Sunday to begin exploratory talks with rivals in a bid to avoid a so-called “doomsday coalition” between the ANC, Mr Zuma's party and the EFF.
DA leaders are exploring a formal coalition with the ANC, which would give the DA some ministerial posts and powers on some parliamentary committees. Some DA leaders are opposed to the idea, according to sources, and no decision has been made yet.
EFF leader Julius Malema, who founded the party after being expelled from the ANC in 2013, said he was open to working with the party.
Zuma's claims of irregularities in the vote count remain a concern. Although the Electoral Commission has said the vote was fair and impartial, his claims could spark unrest, particularly in the eastern province of KwaZulu-Natal, where the MKP won almost half the vote.
Zuma served as scandal-ridden president for almost nine years before being forced to step down by the ANC and his arrest after refusing to testify in a corruption investigation sparked the worst riots and looting since the end of apartheid, leaving 354 people dead.
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–With assistance from Ntando Thukwana, Amogelang Mbatha and Paul Richardson.
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