Finance Minister Nene was this evening, in our [Nomura’s] view, removed from his post by President Jacob Zuma on disagreements over nuclear affordability and shareholder oversight of SAA. He is replaced by David van Rooyen.
We view this as a serious erosion of the institution of the national treasury that accelerates the credit and ratings negative story. Previous assumptions around contingent liability risks and shareholder oversight of parastatals as well as fiscal consolidation in the medium run must now be re-examined. As such, we view this as profoundly negative.
Over the past 10 years, the national treasury has slowly seen the political space in which it operates contract. This has happened with the change in ministers from Trevor Manuel to Pravin Gordhan and then Nhlanhla Nene, and especially on wider microeconomic policy issues. Core fiscal issues, however, have retained investor confidence and the treasury has (until now) always had the ability to undertake (sympathetic) fiscal conservatism.
The removal of a technocratically sound, decent, hardworking, well respected (at home and abroad), fiscally conservative and reform-minded finance minister is a serious blow to (portfolio and corporate FDI) investors for several reasons:
- It is our view that Nene was removed by Zuma likely given how Nene has pushed back on nuclear affordability and tried to exercise shareholder control over SAA. The national treasury’s attempts to exert prudential fiscal and financial oversight were likely incompatible. We do not believe Nene was removed because of fiscal policy. The politics and personalities around the issue of parastatals, however, intervened and required his removal. As such, we think this is an ultimately a victory for the “tenderpreneur” faction of the ANC, rather than an ideological left/centre-left battle. That fact is deeply worrying.
- The assumption that the national treasury is sacrosanct no longer holds, in our view. This is true both in the style and timing of Nene’s removal. We have increasingly feared for Nene’s position but thought government leaders would understand that after South Africa’s ratings downgrade action, pre-budget and probably pre-Moody’s downgrade in Q1, it would be a bad time and they would wait. The lack of sensitivities on this point for a current account deficit and heavily foreign-funded sovereign is worrying.
- If Nene had to go for political reasons, there were better ways of doing it. In our view, the statement from the presidency was incomplete and left more questions than it answered – it says Nene was removed “ahead of his deployment to another strategic position”, but there is no mention of the specific position. On our recent trip to South Africa, we did not come away with the understanding that there were any ‘strategic positions’ more important than Finance Minister open or being created.
- We need to be clear that Nene was praised by ratings agencies for core fiscal conservatism. Thus, in our view, there can be no reason for his firing based on the ratings. The reasoning behind the ratings downgrades was wider government policy and the lack of growth from wider policy.
- We believe the national treasury’s standing is also eroded by the choice of Nene’s successor. Van Rooyen is a member of the portfolio standing committee on Finance in Parliament. He has been a member of the committee since 2011 and so whilst aware of fiscal and national treasury issues, he has no central government experience, and no provincial government experience. From what we have seen he has not been particularly vocal or independent from the ANC whilst on the committee or in the ANC. He was previously the mayor of a small town in Gauteng of around 197 000 people. He does not appear to have had strong policy-making credentials within the ANC structures over the last 20 years in the way the previous three finance ministers did. He has been a member of the economic development cluster of the ANC but as a “whip”, which normally implies a more political than policy role. He is a surprise choice because expectations were that the Deputy Finance Minister, Mcebisi Jonas, would get the job (as Nene did), being trained in the ways of the National Treasury and how the institution works. Bringing in an outsider makes it more of a ‘pure’ political appointment, in our view.
- Overall we view this as a classic case of ‘political balancing’. Even if growth, structural reforms and ratings issues feature on the leadership’s lists of issues – politics simply trump these. As we reflected on in our recent trip notes, we view this prioritisation of political issues over reforms as the reason that SA is firmly on the path to junk status. The actions today accelerate our view. End 2016 / early 2017 may now be the time when the two ratings agencies downgrade to junk. Ratings agencies may initially raise some concern regarding what has happened, but promise to get to know the new Minister before an actual rating action. Such an action would then happen into next year, maybe after the budget.
We believe fiscal is not the immediate concern here. The budget process for February is largely set already within the government, though with a weaker ZAR, higher borrowing costs and lower growth, some adjustments are needed. Our increased fear over fiscal is medium run now. We will have to judge the new Minister on what he does at the budget, especially on revenues and the expenditure ceiling. Expecting massive shocks at this point is less likely.
We believe there is likely to be even less space for microeconomic reforms in the future after today’s move.
We are now even more firm in our belief that the National Treasury Director General Lungisa Fuzile’s contract will not be renewed in May 2016. We watch for if he exits early. Other staff, particularly key people around parastatal management and oversight, also need to be closely watched. Their departure, as well as the DG’s, would be a sign of more accelerated erosion of the institution.
There are also other possible reshuffles as the removal of Minister of Energy Tina Joematt-Pettersson and DTI Minister Rob Davies have been touted.
Today’s move reinforces our view that investors are rapidly becoming significantly and structurally more bearish on South Africa. We noticed this shift significantly in the last few days. The key risks are that the bond curve rerates higher from 8.80% towards around 10.0-10.5%, which would severely stress the budget. It supports our view of being long USDZAR and long SA CDS and underweight external debt.
A key question is what this will do to internal ANC politics, if those on the conservative centre left will see this as a step too far. Whilst we think this will play into the succession debate, we do not think those on the centre-left will see this as enough of a shock yet given the power structures in place; they will instead put more focus on 2017.
We worry that ZAR is becoming less of a USD and FOMC-related high beta trade (though that is still there in the background) and more of a credit and domestic idiosyncratic risk premia driver. As such, it is difficult to define where the upside target is in USDZAR, especially into December liquidity. However, 16.0 seems not an outrageous target. We will have to see where USDZAR settles, but in light of today’s event, our forecast will have to shift to see less chance of recovery from weak levels in the coming quarters as this credit story takes hold.
In summary, we must watch to see what happens with the new mnister and where Nene is redeployed. But this will add to investor perceptions that – with poor timing here and an uncertain choice of new Minister – the ANC is increasingly overlooking and disregarding the views of the market and investors. Whilst investors have no say over policy, and there is the constitutional prerogative of the President to appoint whoever he wants (and that’s the way it should be), SA must realise that with a net international and local borrowing requirement, the consequences have to be lived with.
Peter Attard Montalto is a research analyst at Nomura.