At midnight on Thursday President Jacob Zuma announced the details of a widely-anticipated cabinet reshuffle. Zuma made 20 changes to his administration. Without question, though, the most significant – and concerning – is the removal of the respected and regarded Minister of Finance, Pravin Gordhan, and Deputy Minister of Finance, Mcebisi Jonas. Notwithstanding internal opposition from amongst the top six members of the ANC and its alliance partner, the South African Communist Party, eight other cabinet members were also shuffled. Immediate market reaction was palpable, with the rand moving from R12.80 to the US dollar on Thursday evening to trade as high as R13.60 to the US dollar by early Friday morning.
Zuma’s actions reek of desperation
Gordhan, who was recalled from an international roadshow at the start of the week, has been replaced by Home Affairs Minister Malusi Gigaba. Gigaba is a former ANC youth league leader, and has served in parliament and in cabinet under former President Mbeki and President Zuma. Gigaba has no financial or business experience. Put bluntly, confidence in Gigaba’s leadership at National Treasury is likely to be low given his insipid performance as Minister of Public Enterprises and the visa fiasco that transpired under him as Minister of Home Affairs. He is widely regarded to be a Zuma loyalist. As such, his appointment represents a direct risk to the institutional strength and fabric of national treasury and the maintenance of the fiscal discipline that is Gordhan’s hallmark.
Less surprising is the appointment of Sfiso Buthelezi who has been widely touted as a likely replacement for either Gordhan or – as is the case – deputy minister Jonas. Buthelezi is a seasoned politician, qualified economist and comes with business experience that includes having served as chief operations officer and director of the Makana Investment Corporation – an investment vehicle for ex-political prisoners, particularly those from Robben Island.
There can be no avoiding the observation that Zuma’s actions reek of desperation. Gigaba is South Africa’s fourth finance minister in 15 months, and he is appointed days ahead of the decision to be announced by rating’s agency Moody’s in the first week of April. However, of the three big agencies, Standard and Poor’s has been the most vocal by far. Although their next decision is scheduled for early June there is a chance that the agency’s announcement could be brought forward to an earlier date.
Shift in policy in short term unlikely, but downgrade on the cards
Notwithstanding growing references to radical economic transformation, it is unlikely that we will see any substantial shift in policy in the near term. Still, the growing rhetoric and nature of Zuma’s actions are likely to lead ratings agencies – and market actors – to regard South Africa as a greater investment risk at the end of this week than it was at the start. As a result, there is now a greater probability that Zuma’s actions will galvanise Standard and Poor’s into downgrading South Africa’s debt to sub-investment grade, perhaps as soon as mid-year.
In terms of broader political implications, opposition parties are likely to call for a vote of no confidence and to work to put in place an impeachment motion. There is also a view that Zuma’s actions could prompt resignations from within cabinet and that this faction would enjoy the support of outspoken members of the South African Communist Party and perhaps galvanise Deputy President Cyril Ramaphosa into action. ANC Secretary General Mantashe has also commented in interviews about disagreement and lack of support relating to the cabinet reshuffle. These developments will play out in their own way, and experience suggests that those taking a stance on outcomes are, instead, likely to be met by surprise. Consider, by way of example, the overwhelmingly unanticipated political events that marked 2016, including Brexit and the Trump election.
In the immediate term, we should brace ourselves for currency weakness and market impacts in the form of the repricing of financial assets, including South African bonds and domestic banks. No doubt, there will also be a lot of noise to deal with as politicians deliberate, the country digests and markets decide.
Protecting and growing wealth doesn’t start with a question about “What’s the upside?” but rather “What’s the risk?”
In all of this, the merit of a sound investment philosophy and a disciplined process is reinforced, and we are reminded that protecting and growing wealth doesn’t start with a question about “What’s the upside?” but rather “What’s the risk?” As a consequence, of the above uncertainties, as well as others that we have anticipated – such as normalisation of interest rates in the United States, Trump’s more dramatic policy action and the likelihood of a ratings downgrade for South Africa – we have adopted a conservative stance in our portfolio construction and sought the greatest possible diversification to mitigate risk in each solution. By way of example, we have a low allocation to credit in our money market, income and bond funds; we are short duration in our bond fund; we are underweight bonds in our houseview and balanced fund; we are overweight hedge funds in our houseview; we have overweight positions in protected equity in our houseview and balanced fund; and, arguably most critically, we have held an underweight position on South African assets versus global assets.
Contrary to expectations, near-term impact of weak rand may be positive for economy; long-term effect undeniably negative
Perversely, the near-term impacts on the South African economy could be stimulatory through a weaker rand and more expansionary fiscal policy. The longer-term effects will be unequivocally negative, entrenching Zuma’s record of poor economic leadership. The most obvious long-term effects will come in the form of reduced personal income held back by slower economic growth and eroded by higher consumer price inflation. Interest rates are also likely to move to a higher plane given the implications for South Africa’s credit ratings. Damaged business confidence will keep a lid on much-needed investment spending and economic growth will remain muted. The implication, in turn, for urgently needed job creation by the private sector, is unambiguously negative. Consequently, and perversely, the sought after “radical economic transformation” will become even harder to achieve under Zuma’s revised cabinet.