It is not often that a country sees three different candidates fill the position of Minister of Finance in one week – and yet this is exactly the political spectacle South Africa witnessed in this past week.
Last Wednesday evening President Zuma fired the respected minister of finance, Nhlanhla Nene, in an unprecedented, ostensibly politically motivated move. It is speculated that the axing followed Nene’s opposition to nefarious dealings at South African Airways (under the management of a Zuma crony) as well as to the ANC’s headlong rush into a fiscally irresponsible nuclear deal with Russia.
To compound matters further, Mr. Zuma announced that Mr. Nene was to be replaced by a completely unknown and inexperienced parliamentary backbencher, a move widely seen as putting a more compliant ‘cadre’ in charge of the Treasury.
This was executed against the backdrop of recent sovereign credit downgrades to the cusp of ‘junk’ status by international ratings agencies, and the pending decision by the US Federal Reserve to raise interest rates – both factors that already had the market in a state of nervous anxiety.
The immediate – some would say predictable – result of Zuma’s actions was a disastrous devaluation of the Rand, at one point hitting R16,00 to the US Dollar, R24,35 against Sterling and R17,60 against the Euro. South African bonds and equities were heavily sold down as investors dumped SA Inc., clearly having lost all confidence in the management of the local economy.
Financial and political commentators warned that South Africa’s economy was in a free fall that it would not recover from. The head of the JSE – which saw R169bn wiped off its value in two days trading – released an unprecedented statement on Sunday to warn of serious consequences of these actions on the savings of the nation.
Then, in an embarrassing climb-down on Sunday evening, Mr. Zuma announced the replacement of the newly appointed minister (Van Rooyen) after only four days in the position; he simply reinstated a previous Minister of Finance, Pravin Gordhan – who was himself fired from the same position less than two years ago.
What does the future hold?
The shocking financial seesaw has left South Africans worldwide, as well as international investors, reeling. The appointment of the experienced, conservative and highly regarded Mr. Gordhan has seen some recovery in the both the exchange rate and bond rates, but it will take a long time – if ever – for investor confidence to return.
Deputy chair of Sasfin, David Shapiro, stated that this subsequent move by Mr. Zuma will leave rating agents ‘scratching their heads in madness’ and will not lead to instantaneous market stabilisation. The overwhelming opinion seems to be that although Zuma has made a better choice in Gordhan than Van Rooyen, foreigners and local public and private sectors have lost trust in South Africa’s competence and leadership.
Gordhan is known for being market friendly and fiscally conservative, but the question remains how he will deal with new challenges not presented in his previous term at the financial helm. What, for instance, will Gordhan make of the SAA and nuclear sagas? How will Gordhan rectify the current state of the market? His every move will be closely monitored for signs of political interference; only time will tell.
A more graceful exit for South Africans?
Peter Attard Montalto, Executive Director and Senior Emerging Markets Economist at Nomura, stated that markets rallying back after Gordhan’s appointment could offer people the opportunity and liquidity to exit their SA investments in a more graceful fashion than was possible in chaotic trading last week.
However, although predictions look slightly better in the third week of December, we are not yet sure how widespread and lasting the fiscal damage is. Despite the small recovery in the exchange rate it may never fully recover back to the levels before the crisis.
A number of short-term factors will guide valuations, including the deadline for action on the contentious SAA deal with Airbus and the widely expected interest rate hikes by the Federal Reserve. The latter could even provide some relief, as much of the negativity had already been priced into the currency exchange rate.
However there seems to be no good news for the Rand.
- The weaker exchange rate bodes ill for inflation, driven by imports (including of food due to the debilitating drought which has set in over large parts of the country).
- Once the Federal Reserve raises interest rates for the first time since 2008, the focus will simply shift to the timing of their next move, keeping the pressure on emerging market currencies including the Rand.
- South Africa is still on notice for a sovereign downgrade to junk status, a disaster that some now consider to be highly likely unless there are fundamental changes in government’s approach to business, labour and financial management.
- The economic slowdown in China bodes ill for a recovery in commodity prices, South Africa’s main export product.
- The ANC government still seems determined to proceed with the Russian nuclear deal, the National Health Insurance scheme, minimum wage legislation, and ongoing cronyism and cadre deployment to state owned enterprises (SOEs).
Then there is the 2016 local government elections which will raise the political temperature. It remains to be seen if President Zuma will survive the current mess, or perhaps even be emboldened to push for a third term? Stay or go, there will continue to be volatility due to the inevitable populist tactics and brinkmanship that accompany election time.
Rather safe than sorry
The exchange rate is notoriously difficult to predict. The Rand may show short term strength, but who will bet on the currency not continuing on it’s downward trend in the medium to long term?
South Africans living abroad seem to be cutting their losses en masse and transferring their wealth offshore instead of waiting out the storm and hoping for better days. Of course, there is opportunity for reinvestment in South Africa, but if you have a more conservative view on money matters, chances are you will want to shield your assets from further devaluation.
Talk to finglobal.com about your financial concerns
Moving money abroad right now could prove to shelter many South Africans from an economy which is standing at a decidedly divergent and disquieting crossroads.
There are several routes available for the South African emigrant abroad – these include offshore investment, converting and transferring money offshore, transferring your pension or provident funds or opting for financial emigration.
The finglobal.com team can assess and advise on the best route for moving your money offshore. Do not let South Africa’s financial uncertainty impede on your future – contact us today for financial peace of mind, competitive rates, world-class service and expedited financial solutions to suit your individual needs.[contact-form-7 id=”6581″ title=”Blog post (call me)”]