The world is changing fast and to keep up you need local knowledge with global context.
*This content is brought to you by Carrick Wealth, leaders in wealth and capital management
By Craig Featherby*
South Africa woke up to what can only be described as Bloody Friday following President Jacob Zuma’s midnightly cabinet reshuffle, carried out as a wider series of appointments and shifts in a futile attempt to ‘hide’ and lessen the brutal impact of the removal of his actual target, former Finance Minister Pravin Gordhan and his deputy minister, Mcebisi Jonas.
But nobody was fooled by President Zuma’s firing of 5 ministers and 4 deputy ministers, and appointing or moving around 10 ministers and 10 deputy ministers: the main target was the National Treasury and its two axed political heads. In the process Zuma also got rid of some other ‘enemies’.
Not only was Gordhan’s removal a brutal affair, but a bloodbath ensued when the markets reacted as would be expected.
By mid-morning on Friday, banks on the JSE had R86bn of their market capitalisation wiped out and the rand was in freefall, having already plunged 5% during the night but later easing back somewhat. Of the banks FirstRand was the hardest hit, its share price down 12% to R43.25 from the previous day’s close of R49.12, which equated to R33bn off its market cap. Bonds also plunged with benchmark 10-year government bonds falling the most in seven months, with the yield soaring by 38 basis points to 8.89 percent.
Economists were expecting more negative reaction, with bonds and shares of especially banks, but also retailers and listed property among others also likely to come under significant pressure. Companies with most of their interests based in South Africa are likely to take strain, while South African companies with a strong off-shore base could see share prices rise.
In contrast to Mr Zuma’s sudden and unexpected firing of former Finance Minister Nhlanhla Nene in 2015, the firing of Mr Gordhan has long been coming amidst much speculation the last few months, thus providing some forewarning that this time might just help ease the negative reaction. But it’s no certainty and we’ll simply have to wait and see.
What to look out for
Factors that still need to be digested in the longer term that will influence markets, investors and rating agencies – the latter about to start their next round of assessments of South Africa in a week’s time – include the following
- Whether existing policies and curbs on government spending and debt will be maintained;
- Whether the rating agencies will downgrade South Africa to junk status on the back of these developments;
- What impression the inexperienced new Finance Minister, Malusi Gigaba, makes once he actually takes over the reins and who he will select to assist him;
- To what extent the National Treasury will remain independent, or whether President Zuma will now control it through his two allied political appointees;
- How Treasury officials, who were loyal to Gordhan and Jonas, will react internally;
- Where the controversial Gupta family emerges in all of this (it has been widely alleged the firing of Gordhan and Jonas was a Zuma-Gupta coup to take control of the Treasury in line with allegations of state capture); and
- The extent and nature of public and political reaction to these developments and how it will affect political stability (a concern previously singled out by rating agencies).
Opposition to Zuma
President Zuma’s actions preceding the reshuffle – humiliatingly calling Mr Gordhan back on Monday from his investment roadshow in London – was met with strong opposition from the governing ANC’s alliance partner, the SA Communist Party (SACP) and three of the ANC’s top 6 national leaders. It also galvanised increased opposition to Mr Zuma within the ANC, most evident at the midweek funeral of ANC stalwart Ahmed Kathrada where speaker after eminent speaker directly or indirectly denounced Mr Zuma.
Now, following the axing of Gordhan and the reshuffle, more opposition is mounting. On Friday morning organisations such as Save South Africa and new labour federation, the SA Federation of Trade Unions (SAFTU), were already planning protest marches in Pretoria. Should such popular protests escalate in days and weeks to come, it could also affect the bigger picture that has yet to unfold.
The opposition parties, the EFF and DA, gave notice of their intention to seek impeachment and/or motion-of-no-confidence procedures against Mr Zuma in Parliament. Past attempts were unsuccessful, but this time it remains to be seen whether all or part of the ANC caucus in Parliament, led by Chief Whip and Zuma critic Jackson Mthembu, will abstain from voting or even vote against Zuma, as has been speculated. Should that happen, Zuma could be removed, ushering in an entirely new ballgame that would most likely be strongly welcomed by the markets. But that’s all a very big maybe.
Control of state levers
Mr Zuma has now moved into key positions a number of his close allies, some of them from his home power base in KwaZulu-Natal. This will provide him with even more access to and control over the levers of state power. At the same time those who acted as a check on corruption, spending and mismanagement in government, have been reduced and weakened with the departure of Gordhan and Jonas.
Surprisingly Mr Zuma did not axe several SACP members of his executive who have been critical of him, the Guptas and corruption – particularly Higher Education Minister Blade Nzimande and Public Works Deputy Minister Jeremy Cronin. But that may have been merely a tactical move to prevent the alliance between the ANC, SACP and labour federation COSATU from finally breaking up. Energy Minister Tina Joemat-Pettersson was axed, possibly because she did make enough progress on a proposed nuclear energy deal Zuma wants and which Gordhan opposed.
Axed alongside Gordhan, were some other Zuma ‘enemies” like Tourism Minister Derek Hanekom and Public Service and Administration Minister Ngoako Ramathlodi.
Where does this leave you?
The latest move by Mr Zuma, linked directly to the factional power struggles in the ANC, with Mr Zuma desperately seeking to secure and strengthen his and his faction’s political dominance in the face of growing opposition, came just as things were starting to look a little better for the South African economy.
The rand had strengthened to its strongest level since July 2015; the economic growth outlook was improving; the inflation and interest outlook showed signs of improving; and Minister Gordhan had managed to present a balanced and well-received Budget under immensely difficult circumstances that could have staved off a credit rating downgrade. Mr Zuma has thrown all of that out the window.
So where does this leave you as a private investor, or a high net worth individual with wealth to protect?
As already pointed out, further market reaction could cause more domestic pressures. And any political instability possibly resulting from these developments, will undoubtedly put more pressure on the rand, bonds and shares.
Any political instability, more populist policies, relaxation of curbs on government spending and debt, or further deterioration in the management of state-owned enterprises, are just some of the things rating agencies will be looking out for under the new Treasury regime. If found, they will meet with highly negative consequences, with knock-on effects throughout the economy.
Meanwhile the unstable political and policy environment in South Africa remains subjected to ever more uncertainty. While no South African wants to see large-scale capital flight due to such political volatility and uncertainty, that is exactly what President Zuma’s actions may be promoting. Already corporate investors are thinking twice about coming to South Africa, while some South African companies have already relocated their assets abroad.
For high net worth individuals and investors protecting their retirement income the sensible thing to do under such circumstances is to preemptively diversify and move at least a substantial part of their portfolio offshore. In the meantime, hold on tight as the journey could get a lot rougher.
- Craig Featherby, Chief Operating Officer, Carrick Wealth.