Junk status: the damage done
AFTER ZUMA: FOREIGN INVESTORS SEE MORE OF THE SAME
Foreign fund managers aren’t holding their breaths in anticipation of South Africa’s political problems resolving soon; it’s a party, not a personal, problem, they say.
President Jacob Zuma’s exit, whenever it comes, will be no panacea for South Africa’s deepening political problems which many investors blame on the ANC rather than its 75-year-old leader.
South Africa is a key emerging economy, with a $140 billion bond market and a $825 billion equity market. Their money in turn is key for Africa’s most industrialised economy which relies on these inflows to plug its problematic balance of payments deficit, standing last year at 3.3% of annual economic output.
Street protests
However, the struggles convulsing the governing party have come into sharp focus since Zuma sacked his respected finance minister, Pravin Gordhan, last month, unleashing a wave of street protests and calls from disenchanted voters and the biggest trade union for him to step down.
The turmoil knocked the rand 10% and cost the country its valuable investment grade rating, though thanks to a generally benign emerging markets backdrop, South African markets suffered less near-term pain than expected.
But few believe a lasting recovery or policy reforms will follow Zuma’s eventual departure.
“There are some very deep, profound issues which need to be articulately addressed – time is running out,” said Michael Cirami, co-director for global fixed income at fund manager Eaton Vance, who has little allocation even though South Africa comprises a tenth of the most-used emerging debt index, the GBI-EM.
In his decade in office, Zuma has overseen an economy where growth will slow to 0.8% this year, according to the International Monetary Fund, youth unemployment tops 50% and key labour and infrastructure reforms languish.
Zuma will step down as head of the African National Congress (ANC) in December. Two favourites to replace him are ex-wife Nkosazana Dlamini-Zuma and current deputy president Cyril Ramaphosa, both ANC stalwarts.
Investors’ main fear is the ANC will lurch to the left to appease radical elements rather than undertake painful reform.
“It’s a consequence of a political party that’s been in power too long: It produces immoral people who are out to serve their own interest, it’s become a party which is taking power for granted,” said Jan Dehn, head of research at asset manager Ashmore Investment Management.
“I don’t see this changing even if Zuma goes and Ramaphosa comes in.”
Mathieu Negre, emerging equity portfolio manager at UBP, says while the government has rejected calls to nationalise banks and mines, that fear still lingers. Already underweight, he says “the next move is probably to move more underweight”.
The redistribution focus may start with the current cabinet via more intervention in the private sector through the Public Investment Corporation (PIC), predicts John-Paul Smith, founder of the Ecstrat consultancy.
Contested terrain
“If Zuma’s ex-wife Nkosazana Dlamini-Zuma becomes the new leader, the ANC is likely to fight the 2019 presidential election on
a racially-based agenda around the redistribution rather than the creation of wealth,” Smith said.
“Policy is going to get pulled to the left,” Cirami said. “I fear and worry we will need to see a more meaningful collapse in the economy to get a rethink on what is the best path forward.”