Over to the amorphous markets
Politicians have never liked financial markets, especially falling ones. Finance minister Trevor Manuel famously described them as “amorphous” shortly after his appointment in the 1990s, smarting as he was from a 9% fall in the rand in the month after he took the job.
It was hardly a gigantic slur, but enough to upset foreign investors who were appraising SA’s first black finance minister. The rand fell further.
As the rand continues to hit new lows, touching R19.80/$ last week, what are markets saying about the country now? And what political change could they spark?
Manuel’s frustration was understandable. A collapsing rand has long been taken as a harsh judgment of the government, and by extension the ANC. And it can have a real impact, from the reversal of the appointment of Des van Rooyen as finance minister in 2015 to the fall of Jacob Zuma, which was smoothed by market condemnation.
The appraisal of financial markets is sought and vilified. A credit ratings upgrade is a “resounding vote of confidence in our economy”, but a downgrade “could not have come at a worse time”, as the National Treasury put it in press releases almost a decade apart.
Markets are indeed amorphous, arising from millions of agents all acting on their own individual beliefs. But they are also specific; they reflect the aggregate beliefs of investors about future cash flows, relative to other opportunities. That’s it.
They shouldn’t give a damn about who is in government or who isn’t, who runs Eskom or doesn’t, whether South Africans have national health insurance or don’t. They care only about how profitable companies are, and how likely it is that borrowers (of which the biggest is the government) are going to pay their debts. And these are all relative. One instrument must be compared with those across the available trading universe.
The last two weeks have seen intense belief updating. Bond markets have weakened significantly, with long bond yields spiking to their highest levels in recent memory (bar a brief spike at the start of Covid19). In the past three weeks the rand lost about 8%. The JSE’s all share index struggled to benefit as it usually does from the weak currency, given that much of it reflects dollar revenues and some degree of rand costs. This really is a harsh judgment that the prospects for our economy are dark indeed.
But unlike the case of Nenegate, there is no single cause. The market turning point coincided with the debacle of American concern about a sanctioned Russian ship collecting arms in Simon’s Town, and were further spooked by hawkish comments when the Reserve Bank raised interest rates last week.
These have marked an inflection point, with investors fundamentally shifting their outlook for the economy downwards. It is a painful settling in of reality.
Asset prices are now adjusting to what economists have long been saying: that SA’s growth outlook is a mess. Indeed, as economist Daan Steenkamp at Codera showed in a graph last week, SA is the only big country where the IMF predicts GDP per capita will fall over the next five years.
What will the consequences be? Companies’ profitability is falling as one after the next they reveal load-shedding and input costs are decimating their bottom lines. If companies are less profitable, they are less likely to invest. They won’t expand and therefore won’t hire more people. Lower profits also mean less tax. Over at the bond market, the bleak outlook for economic growth means the government will struggle to meet revenue targets and struggle to keep debt under control. All these factors are making SA assets unattractive.
But the impact on the government and the ANC will come from consequences. Issuing more debt has become much more expensive for the government in the past two weeks. At the same time, the prospects for revenue look bleaker. So, all that the government can do, unless it wants to spook markets into a tailspin, is cut back on expenditure. And that must happen with a year to go to a general election. The ANC will find that deeply uncomfortable. It may well provide space for a political inflection point too.
Investors seem to have concluded that President Cyril Ramaphosa is too timid to make the big decisions needed to course correct. But financial markets have in the past forced timidity into boldness.
While I cannot see a scenario in which the ANC is able to fundamentally change the performance of the government in a way investors will take seriously in the short run, it has few options but to try. Let us see if those amorphous markets will once again force dramatic change.