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Economists Warn South Africa’s Political Transition Could Affect Investor Confidence

South Africa's parliament is expected to elect an acting president this week, following the resignation of President Thabo Mbeki this past weekend. Many observers and some officials of the ruling party, the African National Congress, say the party will nominate deputy party chief Kgalema Motlanthe. The new president will serve until elections are held in about seven months.

Financial analysts say the political transition in South Africa could lead to investor concerns about the country’s economy

Taimur Ahmad is the editor of Emerging Markets magazine in London.

“Any political transition entails risk, even if it is an orderly transition, “says Ahmad, “and there are concerns that it could be more volatile than what has been laid out.”

Ahmad notes that the change comes as the economy is already weakening, with the rand dropping sharply against the dollar and other major currencies and high interest rates depressing consumer spending. Growth is also thwarted by shortages of electricity, which are affecting industrial output. As a result, the economy is expected to grow at about four percent this year, somewhat less than in recent years.

Ahmad says problems in the US financial sector and slowdowns in the US economy have led to a decline in private western investments in emerging markets, including South Africa.

Economists recommend that at this time, South African leaders assure investors that political transition does not mean instability.

“The most important thing is signaling policy continuity,” says Ahmad, “[for example], that they want to keep key ministers in place during this interim period. What you don’t want is a whole cast of new characters or unknowns.” He says South Africa’s leadership will need to get its fiscal house in order with a minimum of volatility.