South Africa is slip-sliding away
RESHUFFLE BLOWBACK: FOREIGNERS IGNORE LOCAL DRAMAS
Firing of Gordhan and Jonas a blow to Treasury’s credibility.
One would have expected the cabinet reshuffle to have a marked impact on markets, as happened when Nhlanhla Nene was removed, but foreign appetite just won’t flag.
The late-night cabinet reshuffle on March 30 rocked South Africa. The firing of Pravin Gordhan and Mcebisi Jonas was seen as a huge blow to the credibility of the National Treasury. And yet, the reaction in financial markets was muted. As Investec economist Nazmeera Moola pointed out at the Glacier i3 conference in Stellenbosch last week, if one looked at the markets now it would appear that there has been no reaction at all.
Against expectations
“We all expected the reshuffle to have catastrophic consequences,” said Moola. “But two months later we would be forgiven for thinking that the impact hasn’t been that bad.”
The rand has returned to trading at the same levels it was before Gordhan was recalled, bond yields are back to where they were in early March and the cost of insuring South African debt through credit default swaps has actually come down.
“The local factors have been completely overwhelmed by the global,” Moola said. “The relatively better emerging market growth environment, coupled with the fact that there is still so much money sloshing around the world, has resulted in $64 billion flowing into emerging market equity and debt funds since the start of 2017.”
These flows have also been accelerating in recent months.
“Since April 1, $12 billion has flowed into emerging market debt,” Moola said. “To put that into perspective, in the last quarter of 2015, at the time Nhlanhla Nene was removed as finance minister, there were roughly $500 million of outflows from emerging market debt funds.”
Moola says “foreign inflows have disguised the impact”.
Foreign ownership in the SA government debt market has increased from 45% in early February to almost 48%, while South Africans have been net sellers.
“But right now if foreign money flowed out I don’t know at what level you would see domestic investors stepping in,” she said. “That’s because the conditions that would lead to an outflow from foreigners would be a reassessment of the local political risk. And that’s the concern.”
Moola has revised her growth forecast for the country from 1.7% before the reshuffle to 0.9%. While a record maize harvest, stronger commodity exports and high tourist numbers will boost growth, she argued that the growth rate will still be lower than it would have been.
“The domestic economy is in recession,” Moola said. “In that context I am worried about government revenues. SA might get higher revenues from exports, but a lot of revenue is dependent on VAT, which is dependent on domestic demand. That is going to leave revenue under pressure.”