The South African election will take place next year, and traders are already anticipating volatility in the rand.
The rand’s one-year implied volatility, which measures price fluctuations over the course of a contract and was at three-year lows last month, has increased dramatically.
It has increased by approximately 70 basis points to 15.8% since July 13, making it one of the five highest rates among developing markets tracked by Bloomberg, along with the Argentine peso, Turkish lira, and ruble, which are all being roiled by political unrest.
In the midst of unrest over frequent blackouts, poor government services, charges of rife corruption, and high rates of poverty and unemployment, the ruling African National Congress is facing its biggest electoral test to date.
According to Annabel Bishop, chief economist of Investec Bank Ltd., at a Bloomberg event in Johannesburg on Tuesday, the market is taking into account a variety of outcomes for the election, including the ANC maintaining its majority or possibly losing support to just below 50%.
What worries us is the possibility of alliances with diametrically opposed policies that can’t function together, according to Bishop. Of course, everyone hopes that we will have a stable government.
While the Democratic Alliance, the major opposition party, has found it difficult to capitalize on the unhappiness, a number of minor parties have witnessed an increase in popularity as voters look for alternatives.
The ANC has lost majority control over several significant municipalities, including the capital Pretoria and Johannesburg’s business district. However, coalitions in municipal government have been plagued by volatility and instability, making effective governance all but impossible.
If no party wins outright control in the elections next year, South Africa is working on a framework that will specify how coalition governments should be formed and run. This framework will help to stabilize tense municipalities and guarantee that the national and provincial governments won’t be thrown off course by internal strife.
“From the perspective of investor sentiment, the politically agitated climate does produce some negativity. Naturally, that might get worse,” Bishop warned. In the event of a coalition, we would thus need to observe who the ANC partners with and hope that they are perceived as being pro-business.
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