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Slim ANC victory margin imperils South African reform

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      By Emerging Markets Debt Team, Eaton Vance Management

      Boston: The African National Congress (ANC), led by President Cyril Ramaphosa, unsurprisingly won South Africa's election last week, but did so with what might be called the "lowest passing grade" from the electorate. The ANC captured 57% of the vote - the first time it has gone below 60% since the end of apartheid in 1994. Just as ominously for the ANC, the party barely retained control of the country's most populous county, Gauteng, with 50.2% of the vote. Only 65% of registered voters voted.

      The most progress in the election seems to have been achieved by the Economic Freedom Fighters (EFF), the far-left party and a splinter group of the ANC. The EFF, which favors radical propositions such as expropriation of land without compensation, won 10.8% of the vote, up from 6.4% in 2014. The EFF became the official opposition party in three of nine provinces.

      Ramaphosa took the reins last year from Jacob Zuma, who is standing trial for corruption after a nine-year presidency that left the economy and government institutions in shambles. Last year, the country suffered a recession for just the second time since 1994. State wages and compensation remain the largest category of spending, accounting for a third of consolidated expenditure - a level that the finance minister has described as "unsustainable."

      During his first year in power, Ramaphosa has taken some important steps. He has replaced Zuma appointees on the boards of state-owned enterprises (SOEs), in the justice department and tax authority. He has pushed an initiative to raise capital investment in the country, and has pledged to reduce government spending and break up Eskom, the SOE electric power utility.

      However, Ramaphosa's initiatives merely reversed some of the damage done during the Zuma years - they are far from delivering required structural reforms needed to deliver growth. Those reforms will be hard to tackle, especially given the dysfunctional power structures of the ANC. The key challenge for the president is his own party.

      The first important clue about Ramaphosa's intentions will take place on May 25, when he forms a cabinet. With 74 ministers, the cabinet is far more bloated than in most countries, and is widely viewed as a conduit for patronage. A move by Ramaphosa to shrink the cabinet would be a positive step.

      Bottom line: South Africa still faces enormous challenges and the ANC is not in a sufficiently better position today to solve them. While we expect the market to be satisfied with the election results, we have low expectations that the ANC will deliver the needed economic reforms.