Are we in a freefall to junk?

After days of speculation, and urgent pleas for President Jacob Zuma to cast aside his impasse with Finance Minister Pravin Gordhan, Zuma fired Gordhan and Deputy Finance Minister Mcebisi Jonas in what the media is labelling the Night of the Long Knives.

Gordhan, Jonas, and a number of other Ministers and Deputy Ministers, were casualties of an urgent meeting between Zuma and the African National Congress (ANC) Top 6 which was held in Pretoria on the evening of 30 March.

Gordhan will be replaced by former Minister of Home Affairs Malusi Gigaba while Jonas will be replaced by former Prasa Chairman Sfiso Buthelezi.

The Rand roller coaster

The fact that Zuma decided to do this while the country is being watched by global credit ratings agencies who are waiting to downgrade us to junk status baffles the mind. Many now feel that this decision will be the one that achieves this.

Just hours before the cabinet reshuffle became official, the Rand started to freefall. Before the tensions between Zuma and Gordhan became public knowledge, the Rand was trading at R12.31 to the Dollar.

At 11:22 pm on 30 March, the Rand slammed on the breaks at R13.37 to the Dollar before pulling back to R13.29. Twenty minutes later, the Rand started to freefall and traded at R13.41 to the Dollar this morning.

A freefall to junk?

Investment Solutions Chief Economist Lesiba Mothata said that given such instability at the helm of the National Treasury, financial markets have already responded negatively with the rand selling off sharply (as shown above).

“Market participants were aware of the risk that Gordhan would be removed. Even though bond markets became more volatile recently, expressing a heightened sensitivity to developments in the political sphere, we do not see evidence suggesting this risk was fully priced in. Our view is that markets are very likely to react adversely now that the risk has materialised and investors should expect significant volatility in the midst of uncertainty,” said Mothata.

Rating agencies have warned repeatedly of the likelihood of downgrading South Africa to non-investment grade should the volatility of the political environment deepen. Although much of the decision will be heavily dependent on what Gigaba says about fiscal policy and its trajectory, markets are likely to fully price South African debt as junk.

“After much positive ground gained last year under the leadership of Pravin Gordhan – especially after the relentless effort by business, labour and government, which made such a positive contribution – that work could easily be wiped out should the new authorities exhibit a major deviation from the policy construct put forward at the February 2017/18 National Budget,” said Mothata.

Political wars

Prior to Gordhans dismissal, there were significant rumours from within the ANC that the party is split down two definite lines and that factionalism was the order of the day.

This has been perennially denied by the top brass from within the party, but we could now see politicians moving away from Zuma and political parties taking the fight to the highest office of the land.

According to a News24 report, Deputy President Cyril Ramaphosa and ANC Secretary General Gwede Mantashe made a last ditch effort to try and persuade Zuma not to fire Gordhan. Ramaphosa and Mantashe again rejected the decision during a meeting with Zuma on Thursday night. This was the second time Ramaphosa and Mantashe objected to Zuma’s plans.

On the morning of The Night of the Long Knives, EFF President, Julias Malema said his party was ready to pass a motion of no confidence against the President. The EFF was also consulting with lawyers to see what their options are and whether a new president can be elected immediately.

The bottom line

Despite assurances that the decision behind the cabinet reshuffle was to increase government efficiencies and to fast track radical economic transformation, it is clear to those who are not even politically affiliated that this was used as an excuse for Zuma to surround himself with yes men.

This is a time for responsible, ethical leadership. If Zuma does leave office, he will most likely be replaced by Ramaphosa. In the lead up to the Night of the Long Knives, it was said that Zuma would face a mass cabinet walk out if he fired Gordan and it was believed that Ramaphosa was one of these people. Let’s see if these were empty words or not.

Editor’s Thoughts:
I wish we could be positive and say that Zuma will make the right decision and step away from the Presidency. However, he survived four votes of no confidence in 2016. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].

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