Coronation: This is no mere redeployment, it’s Zuma’s “Rubicon” moment

One of South Africa’s leading money managers, Coronation Fund Managers, this afternoon broke ranks with the muted response from the business sector by weighing in with a damning assessment of Jacob Zuma’s Presidency. The asset manager, which potentially has much to lose if alienating Government, has issued a statement putting into perspective on disastrous financial consequences of Number One’s firing of Finance Minister Nhlanhla Nene. Its commentary concludes with the view that this is a watershed, akin to the self-destruct button which PW Botha triggered in his “Rubicon” Speech thirty years ago. – Alec Hogg

By Karl Leinberger*

“There are decades when nothing happens and there are weeks when decades happen” Lenin

All clients will by now be aware of the shock removal of Nhlanhla Nene as Minister of Finance on Wednesday. The market’s reaction has been decisive and brutal, with good examples being the currency selling off by 9%, Government bonds by 12% and local banks by around 20%.

Jacob Zuma, South Africa's president, speaks at the swearing in ceremony for David van Rooyen, South Africa's incoming finance minister, at the Union Buildings in Pretoria, South Africa, on Thursday, Dec. 10, 2015. The rand fell for a sixth day in the longest streak of losses since November 2013, stocks slid and bond prices tumbled the most on record after South African President Jacob Zuma fired Finance Minister Nhlanhla Nene and replaced him with a little-known lawmaker. Photographer: Waldo Swiegers/Bloomberg *** Local Caption *** Jacob Zuma
Jacob Zuma, South Africa’s president, speaks at the swearing in ceremony for David van Rooyen, South Africa’s incoming finance minister, at the Union Buildings in Pretoria, South Africa, on Thursday, Dec. 10, 2015. The rand fell for a sixth day in the longest streak of losses since November 2013, stocks slid and bond prices tumbled the most on record after South African President Jacob Zuma fired Finance Minister Nhlanhla Nene and replaced him with a little-known lawmaker. Photographer: Waldo Swiegers/Bloomberg

We are of the view that the move is profoundly negative. The media have spent much time on what this means for corruption in the public sector. Corruption is a cancer that corrodes both the effectiveness and efficiency of the public sector and undermines the economy greatly. However, we think that chronic levels of corruption were already baked into SA’s fundamentals. The greatest consequence of the announcement, in our view, is what it means for fiscal discipline. Throughout SA’s more recent challenges, the SA government has steadfastly remained committed to living within its means. We believe that this is now at risk. Brazil is expected to run a fiscal deficit this year of nearly 10% of GDP, with predictably dire consequences. SA has thus far resisted the temptation to walk this path.

A hard lesson that all populist governments eventually learn is that skills and capital follow opportunity, not need. Foreign capital owns around 30% of our Government bonds and 40% of JSE-listed equities. SA runs a current account deficit of around 4% of GDP. This means that foreign capital inflows are required to balance our books. The risk of a vicious negative cycle is obvious. One where a weaker rand sparks inflation, which forces interest rates higher. In a consumer-driven economy this will further undermine economic activity and result in even more job losses. Investment levels will fall further and with the currency acting as our release valve, the rand would continue to weaken. Ultimately the greatest price for all of this will be paid by the poor, who have no defence against a shrinking job pool and high inflation. While high inflation may hurt the wealthy, it would be devastating to the poor.

Only the flux of time will reveal the full significance of the decision and whether or not some lessons are learnt before it is too late. At this stage, however, we see this as a watershed moment, more likely to be interpreted as Jacob Zuma’s Rubicon speech rather than just another isolated firing of a government minister.

  • Karl Leinberger is the chief investment officer of Coronation Fund Managers