What just happened?
After the sacking of Nhlanhla Nene, SA became a case study in policy uncertainty
The shock announcement that finance minister Nhlanhla Nene had been fired rippled through currency and debt markets on Thursday and Friday, doing exactly what conventional economic wisdom says it should. The rand fell by 10% against the US dollar to a record low of R16. Much of that occurred within an hour of the announcement on Wednesday evening (see graph above).
South Africa’s most important government bonds saw their yields spike with the same speed, rising from 8.87% to 10.45%. This is the highest rate since the onset of the economic crisis in 2008.
The rise will, in essence, raise the interest rate government pays on its new debt by 1.6 percentage points – a big deal considering the already ballooning cost of debt.
All South Africa’s major banks saw their share prices on the JSE plummet for two days in a row. The JSE’s Bank Index, a composite of all the banks, fell by 13.5% on Thursday and another 5.4% on Friday, wiping out billions in market value. This is because the banks’ cost of capital is tied to the government’s, which just rose.
The bond insurance contracts, known as credit default swaps, which are tied to South Africa’s bonds, likewise spiked.
The cost of these insurance contracts are used by many as the proper gauge of how “risky” a government’s debt is. This week, South Africa’s rating on this measure put it between Bahrain and Croatia, and decidedly more risky than Russia.
As a slight silver lining, South Africa’s gold mining companies saw their share prices shoot up thanks to the rand price of gold rising in tandem with the exchange rate.
The unceremonious sacking of Nene has dramatically illustrated how the market paces politics.
It is too soon to say exactly who was dumping South African bonds and banking shares, but the expectation is that it would have predominantly been foreigners.
That means serious capital outflows, which will reflect in economic data later on.
The drop in the rand and the rise in bond yields will lead to a second round of effects.
South Africa’s imports just got pricier, meaning that imported inflation will rise.
The SA Reserve Bank might be forced to more aggressively raise interest rates to contain it and the knock-on effects of more expensive goods and credit will cascade through the economy.
The swift backlash in the markets is fundamentally due to a loss of certainty, says Adrian Saville, chief strategist of Citadel Investment Services.
“When you fire someone with no warning and no explanation, certainty is gone,” he told City Press.
“The question then becomes who’s next? The minister of trade, or minerals?
“At the same time, the new guy is unknown. You’ve replaced the referee mid-game and the replacement’s only experience is in a third-tier league,” he said of Des van Rooyen’s only previous executive experience as mayor of Merafong municipality in Gauteng.
The timing is also horrible.