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After the dust settles, we may come out ok

12 April 2017 Jonathan Faurie

It has been nearly two weeks since The Night of the Long Knives where Pravin Gordhan was fired as Minister of Finance. As the dust begins to settle, what will the ramifications of this decision be?

South Africans are worried; very worried. The impact on the Rand has been significant and any international investors who were hoping to invest in the country are all of a sudden second guessing that decision.

But these are the base concerns. How deep do they go?

Matter of course

Speaking in a press release to the media, Dawie Roodt – Chief Economist at the Efficient Group – said that there are a number of issues at play here; one of which is a vote of no confidence against President Jacob Zuma.

“Firstly, the political drama may turn out completely different. We do know that the opposition parties are sharpening their knives for a vote of no confidence while several legal issues may weaken Zuma,” said Roodt. He added that a likely downgrade and a weaker currency – and everything that goes with it – will all make Zuma’s life more difficult.

“Maybe, just maybe, Zuma overplayed his hand and we could see the end of him,” said Roodt.

Secondly, the Rand took a huge knock but probably less than what many expected. “The reason for this is because the currency has been hugely undervalued for a long period. South Africa has already paid a significant price for this destructive government. And much of the political developments that are happening now have probably already been discounted by the market. In fact, now that we have some certainty I wouldn’t be surprised if the currency acts surprisingly resilient,” said Roodt.

The luck of the bounce

However, Roodt rightly points out that a weaker currency is bad news.

Depending on what happens next, the recent fall in the Rand will add to inflationary pressures, weigh on economic growth, add to unemployment and poverty, and may eventually force the South African Reserve Bank to raise interest rates.

“However, if Zuma overplayed his hand and he is somehow forced out, the Rand is a screaming buy,” said Roodt.

No contentment here

Roodt points out that in the meantime, the markets will not be happy with any of Zuma’s appointed ministers following the reshuffle, especially the new finance minister.

“Rating agencies are very likely to announce a downgrade at any time. In fact, even if the political balance swings in the opposite direction (towards a Zuma departure), a downgrade remains a likelihood. The reason is simply that so much damage has already been done to South Africa’s image that a lot of time will be required to regain our investment status,” said Roodt.

Dr Adrian Saville, Chief Strategist at Citadel, agrees with Roodts sentiments. "Perversely, the near-term impacts on the South African economy could be stimulatory through a weaker rand and more expansionary fiscal policy. The longer-term effects will be unequivocally negative, entrenching Zuma’s record of poor economic leadership,” said Saville.

Emptying pockets

According to Saville, the most obvious long-term effects will come in the form of reduced personal income held back by slower economic growth and eroded by higher consumer price inflation. Interest rates are also likely to move to a higher plane given the implications for South Africa’s credit ratings.

“Damaged business confidence will keep a lid on much-needed investment spending and economic growth will remain muted. The implication, in turn, for urgently needed job creation by the private sector, is unambiguously negative. Consequently, and perversely, the sought after radical economic transformation will become even harder to achieve under Zuma’s revised cabinet," said Saville.

In all of this, the merit of a sound investment philosophy and a disciplined process is reinforced, and we are reminded that protecting and growing wealth doesn’t start with a question about what is the upside; but rather, what is the risk?  Saville pointed out that because of the above tensions, and other political designs and regime changes around the world, Citadel has taken a conservative stance across its portfolios.

Editor’s Thoughts:
After the most recent political disruptions many investors may consider liquidating their domestic assets and moving their portfolios abroad. Making rash decisions like this should be discouraged. Chances are good that the currency will stay volatile, but may in fact appreciate after the dust has settled. However, common sense possibly tells us that this will depend heavily on whether Zuma keeps his job in the coming months. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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