Nene axing: SA becomes case study in policy uncertainty

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Nhlanhla Nene
Nhlanhla Nene

The shock announcement that finance minister Nhlanhla Nene had been fired rippled through currency and debt markets on Thursday and Friday, doing exactly what conventional economic wisdom says it should.

. The rand fell by 10% against the US dollar to a record low of R16. Much of that occurred within an hour of the announcement on Wednesday evening (see graph below).

. South Africa’s most important government bonds saw their yields spike with the same speed, rising from 8.87% to 10.45%. This is the highest rate since the onset of the economic crisis in 2008.

The rise will, in essence, raise the interest rate government pays on its new debt by 1.6 percentage points – a big deal considering the already ballooning cost of debt.

. All South Africa’s major banks saw their share prices on the JSE plummet for two days in a row. The JSE’s Bank Index, a composite of all the banks, fell by 13.5% on Thursday and another 5.4% on Friday, wiping out billions in market value. This is because the banks’ cost of capital is tied to the government’s, which just rose.

. The bond insurance contracts, known as credit default swaps, which are tied to South Africa’s bonds, likewise spiked.

The cost of these insurance contracts are used by many as the proper gauge of how “risky” a government’s debt is. This week, South Africa’s rating on this measure put it between Bahrain and Croatia, and decidedly more risky than Russia.

. As a slight silver lining, South Africa’s gold mining companies saw their share prices shoot up thanks to the rand price of gold rising in tandem with the exchange rate.

The unceremonious sacking of Nene has dramatically illustrated how the market paces politics.

It is too soon to say exactly who was dumping South African bonds and banking shares, but the expectation is that it would have predominantly been foreigners.

That means serious capital outflows, which will reflect in economic data later on.

The drop in the rand and the rise in bond yields will lead to a second round of effects.

South Africa’s imports just got pricier, meaning that imported inflation will rise.

The SA Reserve Bank might be forced to more aggressively raise interest rates to contain it and the knock-on effects of more expensive goods and credit will cascade through the economy.

The swift backlash in the markets is fundamentally due to a loss of certainty, says Adrian Saville, chief strategist of Citadel Investment Services.

“When you fire someone with no warning and no explanation, certainty is gone,” he told City Press.

“The question then becomes who’s next? The minister of trade, or minerals?

“At the same time, the new guy is unknown. You’ve replaced the referee mid-game and the replacement’s only experience is in a third-tier league,” he said of Des van Rooyen’s only previous executive experience as mayor of Merafong municipality in Gauteng.

The timing is also horrible.

South Africa’s government bonds were downgraded by credit ratings agency Standard & Poor’s last Friday, and next week Federal Reserve chair Janet Yellen is making a much-anticipated announcement regarding US interest rates.

Both things are already moving markets.

The adjustment in the rand’s value and the yield on bonds is probably over now, says Saville.

The odds of them recovering any time soon are “very low”, unless President Jacob Zuma comes out with a startling new announcement, says Saville.

“Maybe if he came out and said it was all a mistake ... or gave an explanation, that might help.”

The new rates would, however, probably stick “under every conceivable scenario”, he said.

The crash in bank shares reflects the cost of funding, says Saville. The government’s benchmark bond is a benchmark for the wider capital market, he says.

“If you are lending to government at 10%, why would you lend to a riskier entity for less?”

It might seem odd to see banks like FirstRand as riskier than the state at this point, he adds.

The Response

Most major business lobbies issued a variant of the same statement: puzzlement at the decision, concern about losing what they see as gains made by Nhlanhla Nene and a cautious olive branch to his replacement, Des van Rooyen.

From the Chamber of Mines to the SA Chamber of Commerce and Industry and the JSE, the overall refrain was “why?”.

As the most powerful minister in Cabinet in a time of austerity, Nene has hurt and upset any number of constituencies from the president down to local municipalities.

Most speculation has centred on immediate controversies: Treasury’s opposition to a nuclear build programme, its battle with SAA CEO Dudu Myeni over buying new Airbus aircraft and even the refusal to allow Zuma to buy a new official jet.

But Nene’s short term has seen Treasury take a hard line on other far more fundamental issues that has arguably done untold damage to political networks all over the country right before a crucial local election.

Nene has been overseeing the long-overdue reform of the national tender system through the establishment of the chief procurement officer, a central national supplier database and an online tender portal geared at introducing far more transparency into tender processes.

He has also taken a strict position on the other major sphere of cronyism, the municipalities that often fly under the radar and waste staggering amounts of money.

In March, he invoked his powers under the Constitution to cut off 59 municipalities, a fifth of the total, from government grants that provide 40% of local government revenue.

This was a stick to force them into starting to clear their arrears with Eskom and water boards – arrears that would otherwise become Treasury’s problem when Eskom comes begging for another bailout.

In September, Nene also refused municipalities’ requests for yet another extension to the 2007 regulations on minimum job requirements in local government. This policy sets a bachelor’s degree or equivalent certificate, as well as other criteria, as a basic minimum requirement to hold a senior position in a municipality. The deadline was last year and had already been extended once.

The move was meant to professionalise municipal management and would, if nothing else, make it harder to dish out positions that involve access to public money.

All these interventions in the local sphere of government came ahead of next year’s elections, where the ANC is expected to face unprecedented competition.

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