Nene: The darkest hours are before dawn
There is a famous proverb which says that the darkest hours are just before dawn. But what type of a dawn can South Africans expect to wake up to once all of the recent political grandstanding is said and done?
At a time when South Africa is desperate for economic stability, President Jacob Zuma did the unthinkable and fired Nhlanhla Nene as the country’s Finance Minister and then replaced him with David van Rooyen who many have labelled as a Zuma yes man.
Before we tackle the Nene issue, let’s look at the qualifications our new Finance Minister holds:
• An Advance Business Management Diploma;
• A Diploma in Municipal Governance;
• A Certificate in Municipal Governance;
• A Certificate in Councillor Development;
• A Certificate in Municipal Finance;
• A Certificate in Economic & Public Finance. And;
• A Masters Degree in Public Development and Management.
A bad time for surprises
What effects will this appointment have on the economy? In a press release sent out by wealth management company Citadel, Chief Strategist Adrian Saville painted an uncertain picture.
“Zuma’s decision is concerning at a number of levels. First, it follows last week's credit rating downgrade by ratings agency Fitch and S&P’s ratings outlook revision from stable to negative. It also comes a week before the Federal Reserve meeting (15 &16 December) when US Federal Reserve Chairwoman Janet Yellen is widely anticipated to raise US short-term interest rates for the first time in a decade,” said Saville.
He warned that if there can be such a thing as a bad time to surprise markets, it would be now.
Under pressure
Secondly, Saville said that Zuma’s decision to remove Nene will keep the Rand under pressure and further challenge weak investor sentiment.
“Third, given the relative openness of the South African economy, the weaker Rand can be expected to translate into higher consumer price inflation as a consequence of the pass-through of imported price inflation. Together, these factors are likely to cause higher bond yields, which will undermine fiscal stability and, if anything, point to a ratings downgrade in foreign currency debt to sub-investment grade in 2016,” said Saville.
Is there a silver lining?
Saville pointed out that if there is any silver lining to this dark cloud, it comes in the form of the temporary relief that the rand blowout may give to South Africa’s beleaguered commodity export sector.
However, given the well-known infrastructural constraints, especially the energy and skills deficits, it is unlikely that the rand weakness will assist other parts of the economy such as the manufacturing export sector.
“Zuma’s action reinforces the view that domestic and foreign investors are rapidly becoming significantly and structurally more bearish on South Africa. This is unlikely to change until some sense of policy direction is created by the new finance minister and the first real opportunity to assess this will come in the upcoming February budget presentation. For now, it is a political move that has spooked the market. All we can say with certainty is that the market and the environment always have the capacity to surprise and will do so again in the future,” said Saville.
Dual positioning
If anything, Zuma’s decision will usher in a period of uncertainty into the market.
“Given this, investments should be positioned to cater for risk as well as uncertainty – or what might also be termed unknowability. Investment positioning’s, should therefore remain unchanged despite the latest bombshell. Diversification is an effective and valuable way to hedge against different risks that investors face and the silver lining in today’s rout is that investors should make no changes to their house view,” said Saville.
However, the cabinet shakeup could be good news for the taxpayer. Nene was in the process of putting hard hitting austerity measures into the market and needed cash to do so. Governments main source of revenue is tax, and it was looking likely that Nene would raise the VAT rate.
The question is, will this be a possibility next year? The chances have decreased significantly. Raising the VAT rate has an effect on the poor, and the ANC relies on these votes to stay in power. The ANC is losing traction in key municipalities and with watershed municipal elections coming up next year, keeping the VAT rate stable may be a sign of good faith to the voters Zuma needs.
Editor’s Thoughts:
Cronyism is the appointment of friends and associates to positions of authority, without proper regard to their qualifications, think Hlaudi Motsoeneng and now Van Rooyen who has no degree in a finance related field (only certificates). Many say that cadre deployment is nothing more than cronyism dressed in a different vail. Do you feel that the appointment of Van Rooyen will benefit the market? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
