Zuma Bungle Over Nene Almost Forgotten as Stocks Retrace Losses

  • Benchmark index gains most since Sept. 16 in three-day rally
  • Bonds, rand are still paying for finance minister's dismissal

South African shares rose for a third day to erase the declines that followed in the wake of President Jacob Zuma’s shock dismissal of his finance minister. It’s still a way to go for bonds and the rand to regain losses.

The FTSE/JSE Africa All Share Index rallied the most since Sept. 16 to rise above the closing level on Dec. 9, just hours before Zuma shocked investors by replacing Finance Minister Nhlanhla Nene with a little-known lawmaker, David van Rooyen, sending the rand to a record low and bond yields to seven-year highs. Markets started their recovery as the president backtracked, replacing Van Rooyen with Pravin Gordhan, who served as finance minister for five years from 2009, four days later.

“We’ve obviously had tremendous developments in our market here for the last while, we’re seeing a recovery in some shares that were probably completely overdone in the overreaction -- it was quite a dramatic time,” Ferdi Heyneke, a money manager at Afrifocus Securities (Pty) Ltd., said by phone from Johannesburg. “There was definitely a bit of an overreaction in certain places, but that’s because no one was sure how things were going to pan out at the end of the day.”

The all-share index climbed 2.6 percent to 49,706.29 by the 5 p.m. close in Johannesburg, compared with Dec. 9’s closing price of 49,523.56. The gauge dropped almost 3 percent in the two days following Nene’s ouster. MTN Group Ltd., Africa’s largest mobile-phone operator, and Naspers Ltd., the continent’s biggest media company, had the biggest positive impact on the index, adding 6.3 percent and 5.5 percent.

Fed Rally

Most South African assets are rallying with many global and emerging markets as investors react positively to Federal Reserve assurances that any further moves will be gradual after the first U.S. interest-rate increase in almost a decade.

Yields on rand-denominated debt dropped 20 basis points to 9.34 percent, after surging to as high as 10.65 percent and compared with 8.82 percent before Nene was fired.

The rand weakened2 percent to 15.2462 per dollar as the greenback strengthened against most emerging-market and major currencies. That compares with 14.5929 on Dec. 8, the day before Zuma announced the appointment of Van Rooyen, a former small-town mayor, without explaining why Nene was being moved. It fell to a record low of 16.0543 on Dec. 11.

South Africa’s economy, the largest on the continent after Nigeria’s, is stagnating as electricity shortages, weakening global demand and falling metal prices stifle output. It will probably expand 1.4 percent this year, according to the central bank, which will be the slowest since a 2009 recession.

‘Short-Lived’

“With the Fed hike out of the way, into year-end we would not be surprised to see the rand move below 15 and perhaps closer to the 14.60 level,” Johannesburg-based Standard Bank Group Ltd. analysts, including Walter de Wet, Shireen Darmalingam and Penny Driver, said in an e-mailed note on Thursday. “However, we would expect this level, which was where the rand traded a week ago, to provide resistance. Any strength in the rand may be short lived.”

South Africa’s credit-rating outlook was cut Dec. 15 to negative by Moody’s Investors Service, which said the country faces a prolonged period of slow growth and increasing political pressures. It lowered the outlook from stable and maintained the country’s credit grade at Baa2, the second-lowest investment grade, one level above the rankings of Standard & Poor’s and Fitch Ratings. On Dec. 4, Fitch cut South Africa to BBB-, while S&P lowered the outlook on its equivalent rating to negative from stable, setting the course for a downgrade to junk.

South Africa’s gross debt has surged to almost 50 percent of gross domestic product from about 26 percent in 2009 when Zuma came to power. While Nene had sought to contain spending in a bid to rein in a widening budget deficit, his efforts have been frustrated by the government awarding above-inflation wage increases to workers over three years. Gordhan, 66, pledged to stick to the National Treasury’s expenditure plans.

“Lingering investor uncertainty in the wake of President Zuma’s surprising cabinet reshuffle suggest that the rand is likely to remain on the back foot onto year end,” while bond yields may also track higher, Peter Worthington, a Cape Town-based economist at Barclays Plc, said in a note. “Moody’s move is a reminder that South Africa’s credit ratings are on a downward trend, even if the next move does not happen quickly.”

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