How world sees SA: Fears Zuma will become increasingly irrational – investment analyst

DAVOS/SWITZERLAND, 27JAN10 - Jacob G. Zuma, President of South Africa, speaks at the Opening Media Lunch 'World Cup 2010 - before the kick-off' during the Annual Meeting 2010 of the World Economic Forum in Davos, Switzerland, January 27, 2010 at the Central Sport Hotel. Copyright by World Economic Forum swiss-image.ch/Photo by Michael Wuertenberg

How is the battle between President Jacob Zuma and finance minister Pravin Gordhan likely to end? London-based analyst Peter Attard Montalto, of Nomura, says that global investors fear that Zuma could easily take what market players might deem to be an irrational course of action. There’s much at stake, not only for Zuma. As Montalto highlights: the tenderpreneur faction – beneficiaries of black economic empowerment state procurement processes – is much bigger than the president. While the sands have shifted around Zuma, he is still powerful. The main take-away from Montalto’s analysis is that South Africa’s political landscape is becoming much harder to read. The higher risk is reflected in higher bond yields, he notes. However, after being burnt by recent volatility, international investors are likely to be very cautious about South Africa as they wait to see what Zuma’s next move will be. South African investors with a global outlook will undoubtedly be exploring other geographies to diversify against the increased risks in domestic markets as the biggest political scandal of the new South Africa, #Guptagate, continues to unfold. – Jackie Cameron 

Staff writer

A leading investment analyst on South Africa has warned of fears in the global investment community that President Jacob Zuma could take moves that seem irrational as he deploys a “scorched earth” strategy in the battle with Finance Minister Pravin Gordhan. A scorched earth defence strategy entails destroying everything that could be useful to an enemy.

“We appear to be entering the political endgame in terms of the current political ‘war’, but in this vortex of risks on all fronts things are ultimately unpredictable because the key protagonist – President Zuma – is in a weakened state with only a “scorched earth” strategy remaining to him. We think parliament should be watched particularly closely,” said Peter Attard Montalto, of Japan-headquartered investment bank Nomura.

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“We have had a different narrative around the balance of power this year from the market,” the London-based analyst noted.

“It saw Zuma weakened after Nene-gate and again after local elections. We saw Zuma retaining power until much more recently. This has forced ‘Team PG’ to use a long and subtle strategy.”

Montalto said “the most significant blow all year we believe was the last ANC NEC meeting, where the logistics (as opposed to names) of the succession were discussed and which represented a starting whistle for the succession battle to break into the open”.

“Looking back, we think this was the seminal moment. It meant the ANC was in a much more fractured state when the NPA press conference on Pravin Gordhan’s charges took place, and so senior internal leaders could come out in support of Mr Gordhan and tacitly oppose Jacob Zuma. The most significant evidence of this was this weekend with Cyril Ramaphosa backing Mr Gordhan.”

Pravin Gordhan’s court motion on Friday – requesting the court rule he is not obliged to intervene in the Gupta bank account issue – “will likely now add further pressure given uncertainty regarding the publication of the Public Protectors report on state capture which is subject to an interdict process and may not be resolved until 1 November”.

Montalto expects a “counter attack by Jacob Zuma’s faction”. The most important event to watch is whether the NPA moves to charge Pravin Gordhan on the so-called SARS “rogue spy unit” issue, he said.

“From comments at the press conference last week and in parliament it appears the NPA thinks it has a case. Further revelations from Team PG (Pravin Gordhan), however, are also possible given the structure of his court motion,” said the South Africa expert.

Montalto urged investors not to  underestimate the fact that Zuma “appeals to a particular internal constituency that the market struggles to understand”.

“Nor should we underestimate his ability to undertake what the market might deem an ‘irrational’ course of action like a scorched earth strategy. This is now what we most fear as it seems ‘simple’ routes out for him are increasingly unavailable.”

Turning to the growing rifts within the ANC, Montalto said he believed that, with ANC Chief Whip Jackson Mthembu not supporting Zuma, parliament is the most significant force to watch.

“We think we are moving to a situation of an ongoing stalemate but a fat downside tail risk of a ‘scorched earth’ strategy and that makes assigning probabilities of outcomes impossible. This is exacerbated by Jacob Zuma’s own unpredictability.”

This is “ultimately an existential battle for both sides”, emphasised Montalto. “This makes it difficult to see caretaker strategies, such as Cyril Ramaphosa taking over as an interim President, being politically acceptable on their own, maybe requiring wider compromise solutions involving larger shifts in personnel which would open up risk for investors.”

Montalto pointed out that the “tenderpreneur faction” – which includes nationalists, traditionalists and cadre-deployees – is larger “in absolute size” than just President Zuma.

“In this ultimately unpredictable environment the market’s concern is partly reflected in higher bond yields though investors are largely steering clear of ZAR at the moment after being burned by such volatility last week,” he added.