Gordhan charms on roadshow but investors still wary

Moody’s moves step closer to cutting SA’s rating to junk.

LONDON – South African finance minister Pravin Gordhan won applause for an impromptu London roadshow this week but left many global investors sceptical he could defend his country’s investment grade rating – or even stay in office.

Appointed after a predecessor’s sudden sacking, Gordhan is trying to woo back UK and US-based investors and repair the damage from “9-12”, the December day when President Jacob Zuma suddenly switched finance minister. It took the subsequent appointment of Gordhan, respected for a previous stint at the ministry, to calm markets.

But “9-12” was seen to have seriously dented South Africa’s institutional credibility, adding to investor worries about an economy growing at less than one percent, high inflation, a balance of payments hole, weak commodity prices, frequent labour unrest and power shortages.

Hanging over all that is the very real risk South Africa will lose its investment-grade rating by mid-year, potentially raising borrowing costs for government and firms alike.

Investors who attended the London roadshow told Reuters they were open to being convinced by Gordhan.

“I left the place thinking the minister has good intentions, hopefully he stays in his job,” said Claudia Calich, head of emerging debt at M&G Investments. “But I wasn’t thinking ‘Wow, I should rush out and buy South Africa.'” 

With Treasury officials, heads of companies such as Investec and Barclays Africa, and representatives of powerful trade unions all wearing scarves depicting South Africa’s multi-hued flag, “it was clearly a show of strength and to some extent it worked,” said one bond investor who asked not to be named.

“But I didn’t hear anything that made me believe there would be long-term reforms.”

Gordhan told Reuters the gathering reflected a “new process of dialogue” in an economy sapped by labour unrest.

But on Tuesday Moody’s moved a step closer to cutting South Africa’s rating to junk while data showed the current account deficit widening further and more South African firms heading overseas to invest.

Politics larger than Gordhan

With two major agencies rating South Africa just a notch above junk, Gordhan’s recent budget sharply cut deficit projections. 

But sovereign bonds and credit default swaps (CDS) continue to price South Africa as if it were rated BB-plus, the highest junk category. Investors also questioned Gordhan’s revenue targets and the absence of privatisation plans. 

Then there are doubts over Zuma’s backing for Gordhan after a public spat with revenue service chief Tom Moyane.

“People seemed too frightened to ask outright (about Gordhan) during the presentation,” another attendee said.

But Nomura strategist Peter Attard Montalto said Gordhan had been quite open during the presentation and one-on-one meetings.

“Investors remain very worried on the politics, and their views are not really shifting on the inevitability of downgrade,” he said. 

Gordhan dismissed the fears, telling Reuters that Moyane was “merely the administrative head of an entity”. 

Kevin Daly, a portfolio manager at Aberdeen Asset Management said he came away from the meetings “cautiously optimistic”, adding: “They did their best to allay concerns about the reputational damage of ‘9-12’.”. 

Foreigners have sold stocks worth a net R14 billion ($910 million) already this year, an acceleration from last year’s R765 million net outflow, stock exchange data shows. 

Local bonds, which yield 8-9% are however still attracting money after a net R6.5 billion in 2015.

The bond investor said his allocation was smaller than South Africa’s weight in indexes. Asked if the roadshow changed his view, he said: “I am not going to put more money in, but maybe I won’t take more out.”

The roadshow moves on to Boston and New York. 

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Gordhan’s ‘success’ should not and cannot be calculated on the size of the round of applause he gets after speaking to foreign investors. The measurement should be calculated on the inflow of investment once it has arrived on shore and not locked in possible promises of future investment.

If it is true that “Investors who attended the London roadshow told Reuters they were open to being convinced by Gordhan”, then this whole claim is just a sham and needs to be treated as such. Keeping an open mind is far from being in line to invest at some stage. Just who do they think they will be fooling> Moody’s? Standard and Poors? Not very likely – they have smart people working there who sift through the bull$h!t.

Only when the money gets here (on shore that is) can they claim they can tell that good story they say have to tell. Not a moment before.

End of comments.

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