What just hap­pened?

After the sack­ing of Nh­lanhla Nene, SA be­came a case study in pol­icy un­cer­tainty

CityPress - - Busi­ness - DE­WALD VAN RENS­BURG de­wald.vrens­burg@city­press.co.za

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.



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