By Olivia Kumwenda-Mtambo and Tiisetso Motsoeneng
JOHANNESBURG (Reuters) - South African banking stocks rallied on Tuesday, buoyed by optimism that the newly elected leader of the ruling African National Congress will push through policies aimed at putting the economy on a stronger footing.
South Africa's Deputy President Cyril Ramaphosa - a darling of markets - narrowly beat former cabinet minister Nkosazana Dlamini-Zuma in Monday's vote, marking a pivotal moment for the party that launched black-majority rule under Nelson Mandela's leadership 23 years ago.
As ANC leader, Ramaphosa, a 65-year-old union leader turned businessman, is likely to become the next president after elections in 2019 because of his party's electoral dominance.
Ratings agency Moody's said Ramaphosa's victory opened up tentative prospects of a policy shift and rise in business confidence that "could reverse the gradual deterioration in South Africa's credit fundamentals."
Ramaphosa, a former chairman of Africa's biggest telecoms operator MTN Group, is seen by business leaders as well placed to turn around an economy. South Africa's GDP is estimated to grow by less than a percent this year, while the unemployment rate is at near records just shy of 28 percent.
In an open letter, Mike Brown, the chief executive of South Africa's No.4 bank, Nedbank, urged Ramaphosa to immediately address governance failures in state-owned companies and ensure that the country retains the last sovereign investment grade from Moody's.
"It is important that we have stable and rational policies, creating an environment that encourages growth for businesses and individuals," Brown said.
Ramaphosa's election victory over Dlamini-Zuma, who was backed by ex-husband President Jacob Zuma, put shares in banks, considered the barometer of both economic and political sentiment, back in demand.
In afternoon trade, the blue-chip stock index, the JSE Top-40, added one percent to 51,601 with banks on top of the gainers' list. The banking index rose nearly six percent with FirstRand, the largest lender by market value, surging more than seven percent.
Government bonds firmed, with the yield on the benchmark instrument due in 2026 falling 16 basis points to 8.695 percent.
A local business lobby group, Business Leadership South Africa welcomed the election of Ramaphosa, saying it gave him a chance to address inequality, unemployment and poverty.
"For this to happen, we require regulatory certainty and policy stability that will accelerate and deepen transformation," said BLSA, which is composed of some of the biggest and most influential names in corporate South Africa.
Another key issue facing the ANC's new leader is policy uncertainty in South Africa's mining industry, where companies are challenging a requirement to increase black ownership of firms in the sector to 30 percent from 26 percent.
The sector is a major employer and contributed 7.7 percent to gross domestic product in 2016. The sector also accounts for 25 percent of exports in Africa’s most industrialized economy.
Analysts at U.S. bank JP Morgan raised their economic growth forecast for next year to 1.4 percent from one percent, prompted by Ramaphosa's election.
"The forecast change largely rests on a lesser purchasing power drag on consumers, as outlined below, and perhaps a modest resumption in the capex cycle," the analysts said in a note.
The rand currency retreated on Tuesday from a nine-month high notched up in the previous session. At 1107 GMT, the rand was 0.2 percent weaker against the dollar at 12.7950 rand.
Expectations that Ramaphosa would win the ANC race had pushed the rand to 12.5200 per dollar on Monday, its firmest since March 27 before a cabinet reshuffle by Zuma rocked markets and triggered credit ratings downgrades to "junk".
Ramaphosa will be the ANC's flag-bearer in the 2019 national election, but will have to contend with allies of his defeated rival, Dlamini-Zuma, in his leadership team.
Some investors were worried that Ramaphosa may not be able to push through policy changes because the ANC's top decision making group, known as the "top-six", was split down the middle, consisting of three politicians apiece drawn from Ramaphosa and Dlamini-Zuma's camps.
Ramaphosa's sole rival was Dlamini-Zuma, a veteran campaigner against racial economic inequality and big business interests.
"There is some concern that the split of the ANC top six (officials) might hinder Cyril Ramaphosa's ability to invoke the much needed reforms he has been campaigning on," said Shaun Murison, currency strategist at IG Markets.
(Editing by James Macharia, Editing by William Maclean)