South Africa Faces Watershed as Investors Despair of Zuma

Risks in South Africa Post Finance Minister Firing
  • Record declines in currency, bonds and banking stocks
  • New minister has never served in provincial or national office

Investors are giving up on South African President Jacob Zuma and his ruling African National Congress.

QuickTake South Africa

Less than 24 hours after Zuma sent markets into chaos by abruptly firing his finance minister and replacing him with an untested unknown on Wednesday, fund managers and analysts warned that the ANC’s reputation for prudent financial management was practically in tatters.

Zuma, center, watches van Rooyen being sworn into office on Dec. 10, 2015.
Zuma, center, watches van Rooyen being sworn into office on Dec. 10, 2015.
Photographer: Waldo Swiegers/Bloomberg

“This is a self-induced crisis,” Malcolm Charles, an Investec Asset Management fund manager who oversees about $462 million in assets, said by phone from Cape Town. “Investors are absolutely distraught and they’re voting with their feet. All these guys are selling at a loss and they continue to sell. They’d rather take money to a place where they know what the macroeconomic policies are going to be.”

The announcement that David van Rooyen would replace Nhlanhla Nene comes as the country’s credit rating teeters on junk and the economy reels from power shortages and tumbling commodity prices. The rand fell to a record low, benchmark bond yields jumped the most ever and banking stocks had their biggest slump since 2001.

Rand Slides Under Zuma
Rand Slides Under Zuma
Bloomberg: Type ZARUSD Curncy GP <GO> to chart the inverse course of the rand

The loss in confidence in the government and its ability to manage Africa’s second-largest economy is almost unprecedented in post-apartheid South Africa. With municipal elections looming next year, the unexplained cabinet shakeup could come back to haunt Zuma and the ANC.

Van Rooyen has no experience in provincial or national government. He served as the mayor of Merafong municipality in the central Gauteng province before being appointed to parliament, where he was a member of the finance committee. Nene was deputy finance minister for nearly six years before being named to the top post in May last year.

Poverty Priority

In a statement Thursday, van Rooyen thanked Nene and said the "fight against the triple challenges of poverty, unemployment and inequality" was his chief priority, adding that he would create "favorable investment conditions that will lead to the development of South Africa for all South Africans."

Investors “are justified in speculating that the future budgetary conditions are going to deteriorate and that the new finance minister will be less conservative and pander more to crony interests,” said Rob Price, a market analyst at ETM Analytics in Johannesburg. “Is it a watershed moment? The markets suggest that it is. The market is clearly starting to price in the impact of a downgrade to junk status.’

On Dec. 4, Fitch Ratings Ltd. cut the country’s credit rating to BBB-, one level above non-investment grade. Thursday, it said the decision to fire Nene "raised questions about the motivation for the change." Standard and Poor’s earlier had lowered the outlook on its equivalent rating to negative. A downgrade to junk would spark further capital flight, push up government debt costs and place the rand and bonds under renewed pressure.

Crashing Rand

The currency dropped 2.2 percent Friday, the most among 16 major currencies tracked by Bloomberg, and is down 7.5 percent since the announcement was made. Yields on rand-denominated debt due December 2026 jumped 74 basis points to 10.6 percent Friday. Banking and insurance stocks continued to fall on concerns funding costs for lenders would keep rising.

The blue line represents South Africa’s 6-member banking index, and the white the benchmark government bond yield
The blue line represents South Africa’s 6-member banking index, and the white the benchmark government bond yield

Van Rooyen’s appointment is “certainly a reason for caution,” Colin Coleman, managing director of Goldman Sachs in sub-Saharan Africa, said on Thursday at Bloomberg’s offices in Johannesburg. “It’s a potential game-changer -- on the downside.”

Zuma, a former intelligence operative with no formal education who took power in May 2009, draws his power from his dominance of the ANC and his appointment of allies to key party and government posts.

Deputy President Cyril Ramaphosa and senior ANC leaders, including Secretary-General Gwede Mantashe, were unhappy with the decision to fire Nene, the Johannesburg-based Mail & Guardian reported, citing sources who asked not to be identified. Zuma’s spokesman, Bongani Majola, Ramaphosa’s spokesman, Ronnie Mamoepa, and Mantashe didn’t answer calls to their mobile phones.

Ministerial appointments are Zuma’s sole prerogative, and the changes weren’t discussed at Wednesday’s Cabinet meeting, Jeff Radebe, a minister in the presidency, told reporters in Pretoria, the capital, Friday.

Public distrust in the president stands at a record of 66 percent compared with 37 percent in 2011, while disapproval of his performance is at 62 percent, up from 34 percent five years ago, an Afrobarometer poll of 2,400 people released last month showed.

Nene’s axing may backfire on Zuma and the ANC, according to Ruth Bookbinder, an Africa analyst at Bath, England-based risk consulting firm Verisk Maplecroft.

“Preparations for the 2016 local elections are underway and the appointment of more ill-qualified ministers may galvanize growing opposition to the president and his supporters in the cabinet,” she said by email.

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