Zuma takes South Africa to the brink amid credit risks
RAND DROPS AS MUCH AS 5.4% AGAINST THE DOLLAR AFTER NEW FINANCE MINISTER NAMED
South African President Jacob Zuma took the economy closer to the brink of a junk credit rating after firing his finance minister in a move investors say may undermine fiscal credibility.
Zuma removed Nhlanhla Nene from his post after 19 months without giving any reasons except to say that he would be moved to another key role. His replacement is David van Rooyen, a lawmaker who is little known to South Africans or investors.
The shock move came less than a week after credit-rating companies pushed the nation closer to junk status, citing concerns over a sluggish economy and rising debt. Nene’s departure, and uncertainty relating to his successor, raises questions about whether the National Treasury can stick to its spending targets.
International investors
“Especially at this point in time, we can ill afford to antagonise international investors,” Mohammed Nalla, head of strategic research at Nedbank Group Ltd, said by phone from Johannesburg. “An event of this magnitude can even be the catalyst for a credit-rating downgrade to junk status. It could lead to a complete loss of investor confidence in South Africa, which could push us into a recession.”
The rand dropped as much as 5.4 per cent against the dollar after Zuma’s announcement, the biggest decline since September 2011, hitting a new record low of 15.3857. Yields on benchmark government bonds due December 2026 soared 65 basis points to 9.46 per cent, the highest since the 2008 global financial crisis.
On December 4, Fitch Ratings Ltd. cut the country’s debt to BBB-, the lowest investmentgrade level, while Standard and Poor’s lowered the outlook on its equivalent rating to negative. Fitch said looser fiscal policy, such as upward revisions to expenditure ceilings, may lead to more negative actions.
“We are not so concerned about the person but rather whether Treasury controls the line on fiscal deficits and the debt stock, which we are watching,” Ravi Bhatia, director of sovereign ratings at Standard & Poor’s in London, said in an emailed response to questions.
If the appointment of South Africa’s new finance minister has alarmed investors, it may be because they’ve never heard of him. The rand plunged late on Wednesday after President Jacob Zuma announced that ruling party lawmaker David van Rooyen will replace Nhlanhla Nene, who held the post for less than two years. The currency fell as much as 5.4 per cent against the dollar, hitting a record low of 15.3857.
“I know nothing about the new man,” George Herman, head of South African investments at Cape Town-based Citadel Investment Services, said by phone. “I’ve never heard of him or dealt with him before. The markets are not going to like this.”
While Nene sought to contain spending, his efforts were often frustrated because Zuma’s administration had other higher priorities. The outgoing finance chief clashed with some government colleagues over pay increases for workers, proposals to build a nuclear power industry and plans to expand the state carrier, South African Airways.
“In my view, Nene was clearly axed because he failed to do Zuma’s bidding when it came to managing SAA and funding for proposed new nuclear plants,” said Peter Attard Montalto, an economist at Nomura International Plc, from London. Van Rooyen is “a pure political appointment. We are worried about the fact he has no central or provincial government experience.”
Economic climate
Zuma gave no explanation for removing Nene, saying only that he had “done well since his appointment as minister of finance during a difficult economic climate” and will be moved to another key role.
“There’s no reason to remove Nene, there’s no reason to appoint this person,” Nazmeera Moola, economist and strategist at Investec Asset Management in Cape Town, said by phone. “It will create uncertainty in the market, so it’s clearly negative.” South Africa’s economy already struggling, as the
is price of gold and other key exports plunges. On December 4, Fitch Ratings Ltd. downgraded the country’s credit rating to BBB-, one level above investment grade, while Standard and Poor’s cut the outlook on its equivalent rating to negative, bringing the nation a step closer to junk status.
“We are not so concerned about the person but rather whether Treasury controls the line on fiscal deficits and the debt stock,” Ravi Bhatia, director of sovereign ratings at S&P, said in an emailed response to questions.
Van Rooyen has routinely delivered politically charged speeches and never addressed pressing economic issues, such as fiscal consolidation, according to David Ross, a lawmaker with the main opposition Democratic Alliance.
“I have known him since 2009,” Ross said by phone. “I believe he will be all lost at sea in this new post.”
The ANC said in an email statement yesterday that van Rooyen had the necessary experience to lead the finance ministry.