JOHANNESBURG – If President Jacob Zuma has crossed the Rubicon with his decision to remove finance minister Nhlanhla Nene from his position, it would not be irrational for investors to make sure they have enough money invested offshore, an analyst has said.
In an announcement on Wednesday night, Zuma replaced Nene with whip of the Standing Committee on Finance, Des van Rooyen.
Alwyn van der Merwe, director of Investments at Sanlam Private Wealth, says the announcement came as a shock and “market participants generally don’t like shocks”.
Nene had a good reputation as a prudent minister of finance and has been replaced by somebody without a track record in arguably one of the most important posts in government, he says.
“It did absolutely nothing for confidence and I think it is just very, very negative and most asset prices will respond negatively as we’ve witnessed this [Thursday] morning.”
Grant Webster, portfolio manager in Investec Asset Management’s emerging market debt team in London, says there have previously been some concerns around the outlook for South Africa, but the Reserve Bank and National Treasury have always been held in high regard.
“The Treasury has done a really good job against some very material pressure to increase spending,” Webster says.
Ratings agencies have also kept a close watch on the country’s position. Fitch Ratings last Friday downgraded South Africa’s sovereign credit rating to one notch above junk status. S&P affirmed its rating at one notch above junk status, but revised its outlook to negative.
If South Africa’s rating was lowered to non-investment grade, it would have to exit the WGBI (World Government Bond Index).
Against this background Nene’s removal is a very material change as it sends a message that the institutional quality of the Treasury is potentially also degrading, Webster says.
“The jury is still out, but the immediate signal is not good and the market is reacting really badly to that.”
Rand’s slide overdone?
Following the announcement, the rand weakened to a new low of R15.3857 to the dollar on Wednesday, and traded in a range between R14.8553 and R15.3432 on Thursday according to Bloomberg data.
Van der Merwe says in the short term the rand’s movement is a symptom of foreign investors’ views about the country, the outlook for economic growth and whether people can make money in South Africa.
It is also a symptom of the perceived safety of the investment destination.
On a purchasing power parity basis, the rand – which has lost more than 25% of its value against the dollar since the beginning of the year – was already cheap, and it was astounding that it still sold off significantly from a low base, he says.
The outlook for the currency will in part depend on the new minister’s stance and how he will conduct himself in his new role, but the track record to judge the appointment is lacking.
Van der Merwe says local retail and banking stocks that are likely to feel the brunt of a weaker currency were particularly hard hit.
“I’m convinced that a lot of the selling probably came from offshore.”
In today’s climate of volatile and expensive stock markets, many investors consider bonds to be a safer bet than equities.
But bonds also took a beating following Zuma’s announcement. Yields on South Africa’s ten-year bond – the most liquid of South African bonds – rose from 8.82% to 10.10% overnight.
Ray Wallace, CIO at Taquanta Asset Managers, says this translates into a 7% fall in the value of investors’ bond holdings.
“To put this into perspective – everybody went ballistic when they lost 10% in Abil – which would have been a relatively small holding in most portfolios – unlike large holdings of R186s.”
What it means for SA investors
Van der Merwe says investors have recently favoured rand hedge shares like British American Tobacco and SABMiller. From a valuation perspective these shares were relatively expensive compared to shares that predominantly make their profits in South Africa. This discrepancy has now opened up as a result of very negative sentiment.
Many South African investors didn’t like the announcement and are scared that this is a trend where common sense will not prevail in the managing of the country. Despite the fact that the rand has sold off, South African investors might argue that they would like to invest in safer assets offshore, he says.
But with the rand this weak, many investors are also concerned that taking money offshore will come back to haunt them like it did in the period after 2000.
Van der Merwe says what investors need to ask is whether this event – as one political commentator explained – is the Rubicon for Zuma.
“If that is the Rubicon for Zuma, I don’t think it is irrational to make sure that you have got enough money invested offshore.”
Doomed to junk?
When asked if the risk that South Africa’s credit rating could be downgraded to junk has increased as a result of Nene’s sacking, Konrad Reuss, managing director of Standard and Poor’s (S&P) South Africa, said he “wouldn’t go that far as this point”.
“A rating per se is not dependent on a particular person being in a particular position.”
S&P has taken comfort from the fact that National Treasury under the ministers so far has pursued a prudent policy and is taking a wait and see position at this point.
“If there were to be any policy changes, in particular if we were to see a loosening of fiscal policies, that would be a negative, but it is too early to say for now and we don’t want to speculate about that.”
Webster says the risk that South Africa could be downgraded has definitely increased, but ratings agencies will wait and see how Treasury responds, what the reasons were for Nene’s removal and base their decisions on the country’s outlook from here on.
Van der Merwe says the risk of a downgrade has increased “immensely”.
“We’ve struggled with growth and now suddenly there is an unknown in terms of the management team of the country and that will just lead to further uncertainty.”
This will likely spill over into the rating.