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South Africa is now on a path towards recession, a leading international analyst has warned. President Jacob Zuma might have secured his power within his party in last week’s cabinet reshuffle, but his move has pushed the country beyond a point of no return, says London-based Peter Attard Montalto of Japanese giant Nomura. Last week’s developments surprised Montalto, who was expecting the removal of finance minister Pravin Gordhan – but not a cabinet overhaul of the proportions that emerged. Montalto reckons the cabinet reshuffle is designed largely to ensure that Zuma’s ex-wife Nkosazana Dlamini-Zuma will take over the party in December. Deputy President Cyril Ramaphosa is seen as spineless and the ANC largely unlikely to resist Zuma, which will make it more challenging for the opposition parties to take action against Zuma in Parliament. Montalto warns that the implications of #Zumicon have not yet been absorbed by market participants. The rand could even sink to R15.50 to the US dollar by mid-year. It was trading around R13.50 at the beginning of the week. “Although at the time of Nene-gate we firmly believed there would be no recession (and there wasn’t), now we see a strong possibility of a technical recession. We do not believe there is any particular resilience in the economy to this shock built up from last time,” cautions Montalto. – Jackie Cameron
by Liesl Peyper
Cape Town – President Jacob Zuma’s overnight cabinet reshuffle was a clever and calculated strategy, but one which will result in a profound economic and market shock in the months to come, emerging market economist Peter Attard Montalto said in a company note.
Zuma sent shockwaves through the country when he announced extensive changes to his Cabinet in the early hours of Friday morning, replacing among others finance Minister Pravin Gordhan and his deputy Mcebisi Jonas with Malusi Gigaba (former home affairs minister) and Sfiso Buthelezi (ANC MP and former Prasa chairperson), respectively.
The rand plummeted over 8% in total last week, starting when Zuma suddenly recalled Gordhan from an international investor roadshow on Monday, and dipped to as low as R13.62 on Friday, following the sacking of the finance ministry.
“There’s no way to come back from this,” Montalto from the Japanese bank Nomura, said.
Reshuffle for the sake of December elective conference
Montalto opined that Zuma’s cabinet reshuffle was “designed” to ultimately help the Zuma faction (he reportedly wants former AU Chairperson and his ex-wife Nkosazana Dlamini-Zuma to take over as party president) win this coming December’s elective conference.
“[It] will meet strong resistance, but will not be overcome, given the maths of the ANC National Executive Committee (NEC) and in Parliament,” Montalto said.
According to him, the cabinet reshuffle is a “power play” by Zuma who believes he has a solid majority within the ANC NEC and judges that the fracture within the ANC caucus in parliament is not wide enough and he can still ensure a majority there. (Nomura believes Zuma indeed has the majority within the NEC).
In addition, the Zuma camp requires access to National Treasury and other ministries to move its agenda forward, ultimately to win the elective conference and maintain the integrity and cohesiveness of the Zuma camp’s “patronage machine”.
“There has been very little real resistance to the reshuffle and the removal of Pravin Gordhan,” Montalto said. “We do not believe there will be any meaningful opposition to it, as evidenced by the Deputy President (Cyril Ramaphosa) stating publicly that he will not resign.”
Molefe, Dlamini-Zuma exclusion a ‘clever’ move
“This may goad them (SACP ministers in Cabinet) to resign in our view. Their portfolios do not matter to Jacob Zuma in the approach to the elective conference, and it makes them look weak if they choose to stay. If they go there may well be a second step to this reshuffle to clear out others. We should watch for further steps in this reshuffle puzzle into the elective conference. This is likely part of a long, complicated plan by President Zuma.”
‘Split’ in caucus not as big
Montalto was further of the view that the “split” in the ANC caucus may not be as big as many people expect, and security structures as well as the lack (yet) of market reaction will be used to contain it.
Opposition parties need a minimum of 50 votes, but likely a few more to get a vote passed to pass a motion of no confidence in Zuma. DA leader Mmusi Maimane said in a statement on Sunday that he convened a meeting with the leaders of all opposition parties in Parliament, in order to come together on Monday and agree on the way forward in removing Zuma from office.
The motion is expected to take place in the coming weeks in Parliament.
Meanwhile, The Speaker of the National Assembly Baleka Mbete, committed to a “process of consultation” with relevant parties in respect of the DA’s motion of no confidence.
Markets: where to from here?
Montalto cautioned that the “main market moves” haven’t been concluded yet.
“Indeed, we should remember that the key move happened through the month following Nene-gate (when former finance minister Nhlanhla Nene was fired on 9 December 2015) and represented a 21% move from the post Nene-gate low.”
According to Montalto the rand could reach R15.50 against the dollar by the middle of the year.
“There is a more serious point to be made, however. We think the market is hanging onto the global risk rally and equity momentum trade parallel to a view that there could be a reaction to turn this around and get a decent path to a reform outcome towards higher potential growth.
“We see no likelihood of this outcome materialising. As we’ve discussed previously, even excluding the reshuffle, we do not see a medium-run reform scenario even under [a] Cyril Ramaphosa presidency.”
Montalto said the lack of market reaction this week has sent a strong signal to senior politicians that markets are fine with the removal of a “credible finance minister”.
“More than that, a stronger rand reduced the chance of fallout for President Zuma and so reduces the probability of a reversal and better outcome. A strong currency will likely be used inside the ANC to justify this move and play down opposition to it. As such, the market strengthening on expectations of fallout is ultimately self-defeating in our view.”
Nomura factored in a severe confidence shock to sentiment for domestic private sector investment especially, tighter financial conditions and higher funding costs as well as higher unemployment and lower real wage growth.
“Although at the time of Nene-gate we firmly believed there would be no recession (and there wasn’t), now we see a strong possibility of a technical recession. We do not believe there is any particular resilience in the economy to this shock built up from last time.
“South Africa will now be stuck in a much longer period of negative per capita income growth with risks to the downside on potential growth in the medium run. [A growth rate of] 2% will seem like a very long way off,” Montalto said.
Nomura also lowered the 2017 GDP growth forecast to 0.2% from 1.1% previously. “We (also) lower our 2018 GDP forecast to 0.7% from 1.5% previously, and 2019 from 1.7% to 1.0%.
In addition, it expects larger deficits, driven by debt service costs and a revenue shock but with non-interest expenditure growing meaningfully more. “We expect a focus on faster debt issuance but also expect a meaningful additional, faster build-up of contingent liabilities.”