Pain and pressure: Zuma’s Christmas gift to economy
Nene sacking ‘will plunge SA into recession next year’
THE bloodbath unleashed on domestic markets following President Jacob Zuma’s unexplained dismissal of finance minister Nhlanhla Nene on Wednesday is likely to nudge South Africa into a recession next year, and will inevitably tip the country’s sovereign credit ratings into junk status.
These were the expert predictions as the knee-jerk reaction triggered by the news that Nene was axed — apparently for political expediency — progressed into convulsions on Friday, with investors taking fright at what the decision might mean for the integrity and autonomy of the country’s top financial institutions, painstakingly built up over the past two decades.
Inflation is set to soar in the wake of the rand’s free fall, during which the currency lost 10% of its value against the dollar, sinking to a record low of R16.05/$ at one stage on Friday. The rand also hit new lows of R24.18 to the pound and R17.45 against the euro.
The depreciation is likely to compel the Reserve Bank to raise interest rates faster and more sharply than anticipated, adding to the burden on heavily indebted consumers.
At the same time, yields on the benchmark 10-year government bond soared 150 basis points as prices fell, which also means that borrowing costs will climb for the public and private sectors.
The JSE weathered the turbulence somewhat better, shedding less than 3% of its value, but share prices for South Africa’s top banks plummeted by up to 10% immediately after the news.
At the heart of the volatility lies the doubt that Zuma’s decision has cast over South Africa’s sound and independent fiscal policies, which have helped to offset the economy’s flagging pace of growth and deteriorating state-owned entities in the eyes of international investors.
Nene’s dismissal has been linked to his resistance to plans by SAA to restructure its procurement deal with Airbus, and to the government’s costly nuclear build project — both of
CLOSELY WATCHED: David van Rooyen, about to be sworn in as finance minister on Thursday at the Union Buildings, Pretoria, as President Jacob Zuma looks on which are supported by Zuma.
“Apart from the unceremonious nature in which Mr Nene was relieved of his duties, this coincides with what is perhaps the weakest point in our economic standing over the past two decades, and is likely to spawn a cocktail of damning consequences,” said Standard Bank chief economist Goolam Ballim.
“Judging by the financial markets’ response to the ministerial change, not only has South Africa scored an own goal, it has also stolen Christmas.”
FNB chief economist Sizwe Nxedlana said he would revise his economic forecast for next year down to between 0% and 0.5% from 1.2% previously, and believed that a technical recession — defined as two consecutive quarters of negative growth — could be on the cards.
“To all intents and purposes we will be in a recession — this is a game-changer,” he said.
The appointment of David van Rooyen, a former mayor of Merafong with no experience at the Treasury, compounded the consternation in financial markets. Van Rooyen is perceived as a political lightweight who will comply with Zuma’s wishes.
Two of the top global credit rating agencies, Standard & Poor’s and Moody’s Investors Service, were relatively tightlipped on the new appointment, saying they would have to wait and see whether the Treasury sticks to its spending and debt targets, already under pressure from the slowing economy.
But Fitch Ratings, which last week downgraded South Africa by one notch to BBB- — the lowest investment grade — was more forthright, saying: “The change would be relevant to our sovereign rating assessment if it led to a loosening of fiscal policy, such as an upward revision to the government’s nominal expenditure ceilings, and a faster increase in government indebtedness.
“It would also be relevant if it led to a weakening in transparency and financial management in state-owned companies.”
Investors waited in vain for reassurance from Van Rooyen, who merely said in a bland statement on Thursday that he would “endeavour to ensure every policy is directed at creating favourable investment conditions that will lead to the development of South Africa for all South Africans”.
Van Rooyen’s first national budget, in February, will be closely scrutinised for signs that financial discipline is slipping, and this is when South Africa could face downgrades to subinvestment, or “junk” status.
S&P changed the outlook on its BBB- rating for South Africa to negative last week, which means that there is at least a one-inthree chance that it will be downgraded in the next couple of years.
The spread between South African and US bonds, measured by credit default swaps, which serve as a barometer of country risks, has exploded in the past few years — widening from an average of about 145 basis points in the decade to the end of 2014 to 300 basis points now. This is the same level as Brazil on the eve of its downgrade to “junk” in September and is roughly the same level as Turkey and Russia now — both of which are subinvestment grade.
The blowout in South Africa’s financial markets could not have come at a worse time — the US Federal Reserve is expected to start its rate-hiking cycle this week, an event that is likely to put further pressure on emerg-
The fear arises that other institutions might be subject to interference
ing market currencies and exacerbate capital outflows from their economies.
But this has now taken a back seat to the country’s domestic woes as investors and analysts wonder about the broader implications for South Africa’s economic policy, and its other institutional bulwarks, such as the Reserve Bank, whose independence is enshrined in the constitution.
“Beyond the obvious negative impact of this decision, there are secondary concerns,” said George Glynos, MD and chief economist at ETM Analytics.
“If a minister as important as finance is no longer sacrosanct and can be hijacked for an alternative agenda, the fear arises [that] other institutions of influence, such as the Reserve Bank, might also be subject to political interference.”
Trading volumes are typically thin at the end of the year, which means that any movements in the rand will be exaggerated. Glynos thinks the currency could head towards R17 or even R18 to the dollar in the near future. Comment on this: write to tellus@sundaytimes.co.za or SMS us at 33971 www.sundaytimes.co.za