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Who’s propping up the Rand?

by Andrew Rissik | Jun 21, 2017
  • July 2017 is upon us and so is radical economic transformation! Months after the cynical cabinet reshuffle, with Malusi Gigaba coming in as Finance Minister, and ratings downgrades from all three ratings agencies, with S&P and Fitch rating South Africa as sub-investment grade, the Rand seems to be holding up remarkably well. So, what’s going on?

    South Africans are scared, the future is uncertain politically, the economy is all but officially in recession and there is no clear plan or strategy to call the nation together and plan our way out of the mess we find ourselves in.

    The constant self-inflicted economic pain that comes as a result of extremely questionable political and economic decisions comes at a great cost to every South African. The worry is that there are more of these poor decisions to come and it’s easy to liken President Zuma to a wounded buffalo that is severely threatened, but is still capable of more damage on his way out (whether that’s in five months of two years from now).

    Another own-goal courtesy of Zuma Inc.

    In June, we saw Busisiwe Mkhwebane, the Public Protector, sticking her nose into the affairs of the SARB and speaking of changes to its constitutional mandate. The news sent the Rand down over 1% in a matter of hours, and while the SARB will no doubt successfully fend off this particularly blunt and ill-conceived attack, it is a worrying indicator of possible attacks to come. Our Reserve Bank has been one of the few bastions of good governance, it’d be a shame if we fail to protect its integrity.

    The upcoming ANC policy conference (30 June to 4 July) has no doubt influenced Mkhwebane’s remarks, as many in the ruling party and government want to demonstrate their support for their respective ANC candidates. This latest move from the Public Protector puts her firmly in the radical economic transformation (Zuma’s) camp. With the ANC so divided, we can expect more grandstanding like this leading up to the December elective conference as political jockeying intensifies.

    Just as political rhetoric escalated in 2010 and again in 2012 at Polokwane, so too will it intensify in the run up to the ANC’s elective conference. Be braced for some outlandish statements and some serious strain on investor patience as politicians all attempt to out “radical economic transformation” each other.  This will continue to undermine confidence and South African specific risk will rise.

    It affects the Rand and the man in the street

    There are other, longer-term, trends that are undermining confidence in South Africa. The daily scandals that show how segments of the ruling party are milking the economy through dodgy deals and mismanaged state-owned enterprises have hit us hard internationally. South Africa’s private sector companies – the biggest creators of wealth, jobs and state revenues – also have very little trust in the government. Ordinary tax-paying citizens are also fed up. Without private tax payers, and without international investors, the state will eventually collapse.

    While there are signs that Zuma’s camp is on the run, and that the rule of law can still be relied on, it’s hard not to get increasingly cynical when staring down the barrel of a recession. The big question is how do we revive confidence in the economy, both locally and abroad?

    Where is the light at the end of the tunnel?

    We cannot follow the path of Zuma’s administration. If we do, Malusi Gigaba and his deputy Sfiso Buthelezi will face an impossible task; government’s radical economic transformation is ill-thought out and has very little to it other than populist rhetoric. Further, the way these two Zuma-loyalists were appointed has destroyed the trust between business, government and labour. On top of this, Gigaba is associated with state capture. How is he to lead a concerted effort between private and public in South Africa?

    Gigaba has even been accused of having facilitated state capture in state-owned enterprises while he was Minister of Public Enterprises. He is unsuitable to the finance ministry. Rating agency Moody’s highlighted South Africa’s deteriorating institutional strength as one of the reasons it downgraded our credit rating to just above junk, and with Gigaba heading up the National Treasury, a downgrade in December is looking likely.

    When investors and agencies assess our political situation, they will compare Gordhan and Gigaba, as well as former deputy minister Mcebisi Jonas and Buthelezi. Buthelezi is associated with improperly benefitting from Prasa tenders while Jonas is known for rejecting a bribe from the Guptas. Gigaba meanwhile has long been seen as a tow-the-line Zuma loyalist, while Gordhan was fiercely independent.  It doesn’t take a genius to predict how these assessments will play out.

    And yet... The Rand is doing quite well

    So why the strangely strong Rand? The current economic crisis is disguised by hot money. Billions of Dollars have been flowing into emerging markets and are propping up financial markets. In South Africa’s case, we are seeing the Rand and government bonds, surprisingly, doing well. This phenomenon is driven by fund managers and their insatiable appetite for yield, compelling them to move flighty capital from developed to emerging markets. Meanwhile, more sustainable investment in production by private companies is in a prolonged period of decline due to an internal crisis of confidence.

    This Rand pseudo-strength might change if South Africa gets its Rand-denominated debt downgraded to junk status by Moody’s. Such a downgrade would mean we drop out of the Citibank World Government Bond Index. This would trigger automatic sales of between USD 7 billion and USD 10 billion in government bonds, according to Colin Coleman, head of Goldman Sachs’ South African office.

    So, brace yourselves for a roller-coaster ride to the ANC elective conference in December. This will be the watershed – either a 10-year continuation of destructive politics of patronage, or a return to more moderate and skills-driven economic policies. In the medium-term there will be a continuing trend where the Rand is losing ground against its emerging market peers.

    When assessing the medium- to longer-term sentiment and fundamentals, my view remains Rand-negative. In the short term, however, the Rand will be influenced by the global backdrop as forces in the developed world create their own volatility.

    Andrew Rissik is our Director of Forex and International Projects. If you need any advice on what to do in these volatile times send us an email.

    We are a professional services company that specialises in cross-border financial and immigration advice and solutions.

    Our teams in the UK, South Africa and Australia can ensure that when you decide to move overseas, invest offshore or expand your business internationally, you’ll do so with the backing of experienced local experts.

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