Aug. 28 (Bloomberg) -- South African President Jacob Zuma was propelled into office this year by union support. So far, it is investors who are reaping the benefit.

Zuma, who campaigned on promises to create jobs and slash poverty, began by removing two union foes: Finance Minister Trevor Manuel and central bank governor Tito Mboweni. He then named replacements who once worked for Manuel and Mboweni and who have favored their predecessors’ economic policies, which labor officials say stifle growth and employment.

That has some analysts comparing Zuma to Brazilian President Luiz Inacio Lula da Silva, who panicked investors with his anti-capitalist rhetoric when he came to power in 2003, only to implement market-pleasing measures later. Since Lula took office on Jan. 1, 2003, Brazil’s gross domestic product has tripled to become the world’s eighth-biggest economy.

“Zuma is pulling a Lula,” said Lars Christensen, head of emerging-market strategy at Danske Bank in Copenhagen. “Zuma is a pragmatist. I can’t see any big differences between Zuma’s policies and those of his predecessors. No one expected that.”

The president has maintained the inflation-fighting policies of his predecessor, Thabo Mbeki, has met investors to reassure them, has said that public spending may need to be curbed and has commissioned a study on using tax revenue more effectively. Yesterday, Gwede Mantashe, secretary general of Zuma’s African National Congress, said labor unions have no undue influence over the president.

Best After Brazil

South Africa’s rand is the second best-performing emerging market currency of the 26 monitored by Bloomberg this year. The first is the Brazilian real. Ex-union leader Lula kept spending in check and named as central bank president a FleetBoston Financial Corp. executive who resisted pressure from some members of Lula’s Workers’ Party to immediately cut rates.

Almost four months into his term, Zuma is adhering to the free-market approach that angered his union backers when implemented by Mbeki. Investors who were irked by Zuma’s ties to labor now say Zuma’s South Africa is looking like a good bet.

Since the April 22 election, the rand has gained 13 percent against the dollar, the benchmark South African stock index has advanced 26 percent and credit default swaps, the cost of protecting against a default, have dropped by more than a third.

“Zuma appears to be making very solid decisions,” said Joseph Rohm, fund manager of the $300 million Africa & Middle East Fund at T Rowe Price International Plc in London. “We are encouraged that what was a business-friendly environment has been maintained.” He said he has been buying South African assets, though he declined to be more specific.

Police Questions

Opposition parties accuse Zuma of failing to act against corrupt officials and making inappropriate appointments to key positions, including the head of the police.

Zuma’s conduct “suggests a lack of respect for the constitution and in turn for good governance and best democratic practice,” Athol Trollip, parliamentary leader of the Democratic Alliance, the main opposition party, told reporters in Cape Town yesterday. “There is a yawning gap between the president’s words and actions.”

Zuma has appointed senior unionists and South African Communist Party leaders to his cabinet, though they have little say over fiscal or monetary policy.

Blade Nzimande, head of the Communist Party, became minister of higher education. Ebrahim Patel, previously secretary-general of the South African Clothing and Textile Workers Union, was named economic development minister, a new post with undefined powers.

Planning Head

And Zuma has created a new post for Manuel as head of a government planning commission that may allow him to steer overall government policy and maintain programs that he spent more than a decade putting in place at the treasury.

Union leaders say they remain confident that Zuma will act in their interests.

“If you look at the current cabinet, it reflects new ground,” said Irvin Jim, general secretary of the National Union of Metalworkers of South Africa, which has held demonstrations outside the central bank demanding lower rates. “Our interests have been accommodated.”

The union leaders are asserting Zuma is with them because “it’s in their interests to do so,” said Steven Friedman, director of the Centre for the Study of Democracy in Johannesburg. In reality, he said, “nothing has changed. The fundamentals remain the same.”

No Mine Nationalizations

The president on July 10 dismissed calls from the ANC’s Youth League and the Congress of South African Trade Unions for the country’s mines to be nationalized, saying that it was “just a debate.”

Zuma, 67, won a leadership race against Mbeki for the top position of the ruling ANC in December 2007 with the help of unions and the Communist Party, which said they had been sidelined during Mbeki’s rule. Unions lobbied ANC members on Zuma’s behalf ahead of the party vote, and then in 2008 called for Mbeki’s departure.

Unions have pressed Zuma to favor workers and the poor, by pushing for cuts in the benchmark interest rate from the current 7 percent, spending more on welfare for children and creating jobs for the almost one in four South Africans without work.

The selection of Zuma’s economic team, instead, shows that Mbeki’s policies haven’t been altered.

Finance Minister Pravin Gordhan served as head of tax collection under Manuel, 53, while Gill Marcus, who becomes central bank governor in November, helped Mboweni set up inflation-targeting when she served as one of his deputies. The goal is to keep price increases in a band of 3 to 6 percent.

Enemies of Targeting

That contrasts with the unions’ demands.

“We are obviously great enemies of inflation targeting,” Zwelinzima Vavi, the general secretary of the trade-union congress, said in July when Zuma announced Marcus’s appointment, adding that the labor federation won’t “shed any tears” over Mboweni’s departure.

The economy is in its first recession in 17 years, mining companies such as Johannesburg-based Anglo Platinum Ltd. and London-based Lonmin Plc have fired thousands of workers, and this year’s budget deficit is expected to exceed a decade-high forecast of 3.8 percent of gross domestic product. South Africa relies on foreign investment to fund a current account deficit of 7 percent of GDP.

“Zuma has to keep the unions happy, but he can’t let investors run away,” said Peter Attard Montalto, an emerging market analyst at Nomura International Plc in London. “There will be plenty of noise from the unions, but we don’t see any major changes in economic policies.”

Labor unions may start agitating for more from Zuma if they don’t see any payback. During Mbeki’s rule, the trade-union congress called national strikes to protest rising prices and questioned whether the federation should maintain its alliance with the ANC, which, with support from the Communist Party, helped ANC candidates dominate in South Africa’s first four all- race elections.

“It’s almost inevitable that Zuma will come into conflict with the unions,” said Nic Borain, a political analyst in Cape Town whose clients include HSBC Holdings Ltd. “The unions are going to be as critical of Zuma” as they were of Mbeki.

To contact the reporters on this story: Nasreen Seria in Johannesburg at nseria@bloomberg.net

Last Updated: August 27, 2009 18:01 EDT