The world is changing fast and to keep up you need local knowledge with global context.
Events of the past 12 hours bring Canadian author Malcolm Gladwell’s classic book The Tipping Point to mind. Gladwell describes it as a critical juncture after which everything changes direction, “the moment of critical mass, the threshold, the boiling point.” In August 1985, the last proponent of Grand Apartheid, President PW Botha, pushed his country over the edge of a tipping point in his Rubicon Speech. What followed was a backlash of epic proportions resulting in a massive cash outflow from South Africa and the rapid crumbling of a once seemingly impregnable regime. There are powerful parallels with the actions last night of Botha’s successor. Jacob Zuma. His firing of respected Finance Minister Nhlanhla Nene sends a clear message to members of Zuma’s political party, his fellow citizens and the world in general: it is Zuma alone who makes the rules and if he wants to plunder the public purse, get used to it. As with Botha, with last night’s action Zuma is no longer even pretending to run a democratic movement in a democratic country. You’re either with him – and all the future risk that entails – or you’re out. But this time he has miscalculated. Badly. When you run a country accounting for less than 1% of global GDP (down from 0.88% in Botha’s day to 0.65% now) stepping too far out of line invites retribution. Referencing Gladwell again, when it comes to a global view of South Africa, London-based analyst Peter Attard Montalto is what the author describes as a maven – “a trusted expert in a particular field who seeks to pass knowledge on to others.” London-based Montalto, who works for Japanese financial giant Nomura, has made SA his area of speciality and as a result is the go-to man for the international investment community. So his reading of the Nene firing, blasted out in a report last night, is as close as you’ll get to the way the rest of the world will interpret Zuma’s latest folly. And, quite clearly, it is a miscalculation by the man of his own power base which is likely to turn into his own Rubicon. Unfortunately, as with Botha’s, it’s a foolish decision that will hurt the entire country. – Alec Hogg
The top rated global analysts on South Africa, Nomura’s London-based Peter Attard Montalto, has interpreted the axing of South African Finance Minister Nhlanhla Nene as a serious blow to investors.
In a powerfully worded report penned immediately after last night’s announcement by President Jacob Zuma to “redeploy” the country’s bank manager, Montalto described the consequences as “profoundly negative” and certain to accelerate South African debt’s fall into junk status.
Montalto says the “sound, decent, hardworking and well respected” Nene was removed because of his resistance to Zuma’s proposed $100bn nuclear deal and attempt to stop the plundering of South African Airways by politically connected cadres.
Nhlanhla Nene removed as Minister of Finance. Good governance seems to be evil in President Zuma’s administration. Here comes junk status
— Tshepo Thlaku (@Thlaku) December 9, 2015
He summarises the implications for investors in six points:
- Nene’s removal is directly related to pushing back on nuclear affordability and trying to exercise oversight on SAA. It has nothing to do with his competence at managing the country’s financial affairs. It is thus “a victory for the tenderpreneur faction of the ANC rather than an idealogical left/centre-left battle. That fact is deeply worrying.”
- His firing destroys the assumption that National Treasury is sacrosanct while the timing when SA debt has fallen to the cusp of junk status reflects ignorance of the financial realities facing the country: “The lack of sensitivities on this point for a current account deficit and heavily foreign currency-funded sovereign is worrying.”
- If Nene had to for for political reasons, Montalto offers, there were better ways of doing it than through an incomplete statement suggesting he was needed elsewhere: “On our recent trip to SA we did not come away with the understanding that there were any strategic positions more important that Finance Minister.”
- It is obvious that Nene’s firing had nothing to do with the double downgrades: “Nene was praised by ratings agencies for core fiscal conservatism. The reasoning behind the downgrades was wider government policy and the lack of growth from wider policy.”
- Montalto is also highly critical if Nene’s successor David van Rooyen: “He has no central government experience and no provincial government experience. He has not been particularly vocal or independent. He was previously the mayor of a small town of around 197k people. He does not appear to have had strong policy making credentials within ANC structures over the last 20 years in the way the previous three Finance Ministers did.” Montalto said the expectation was that like Nene, the Deputy Minister Mcibisi Jonas would eventually succeed to the top job: “Bringing in an outsider makes it more of a pure political appointment.”
- He believes the country is now firmly on the path to having its debt rating as “junk” probably around the end of 2016 or early 2017: “Ratings agencies may initially raise some concern regarding what has happened, but promise to get to know the new Minister before an actual rating action.” We view this as a classic case of political balancing – this prioritisation of political issues over reforms is the reason SA is firmly on the path to junk status.”
Montalto is watching for early exists from Treasury in the wake of this decision, with the competent Director General Lungisa Fuzile likely to be among the first. Overall the firing of Nene “reinforces our view that investors are rapidly becoming significantly and structurally more bearish on South Africa. we noticed this shift significantly in the last few days.”
But there is some hope: “A key question is what this will do to internal ANC politics if those on the conservative centre left will see this as a step too far.
“Whilst investors have no say over policy and there is the constitutional prerogative of the President to appoint whoever he wants, Sa must realise that with a net international and local borrowing requirement, the consequences have to be lived with.”
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