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SA at risk of investor isolation amid a perfect storm for financial markets

SA at risk of investor isolation amid a perfect storm for financial markets
Illustrative image | Sources: President Cyril Ramaphosa. (Photo: Waldo Swiegers / Bloomberg via Getty Images) | pngtree | flyclipart

Cyril Ramaphosa stepping down could unleash a perfect storm in financial markets that would render a 4.2% slide in the rand small fry compared to the 2001 rand crisis. Investors hate the unknown, and with no sign of a successor who would ease investors’ worries, they will put SA into self-isolation. 

It’s a real tragedy that South Africa is heading into the festive season with the threat of a perfect storm, brought on by a political crisis, hanging over our financial markets — just when good news is coming through on the global economic front.

What could that perfect storm look like? The rand’s 4.2% slide to 17.9596 to the dollar on the day the outcome of Phala Phala was made public may seem a strong response to the very real prospect of Ramaphosa stepping down. But, if history were to repeat itself, a move of that size is a small fry compared to the off-the-charts depreciation that the currency has experienced several times.

The 2001 rand crisis comes to mind when the currency fell off a cliff, with no obvious trigger setting the sharp depreciation in motion. The rand weakened 41% from R9.7950 a dollar to R13.86 in November of that year.

Thus it left everyone bewildered, and even after a full-blown investigation into the rand, no one could identify a single compelling reason for why it happened.

Thereafter, the currency had a habit of experiencing long periods of stability and then heading into an outsized sell-off in reaction to adverse events. That means that were the currency to respond as sharply as it has in the past to a Ramaphosa resignation, R20 to the dollar would be well within reach.

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The bond market’s response was arguably more reflective of the extent of the shock brought on by the scary prospect of Ramaphosa’s downfall, with the 10-year benchmark government bond selling off 74 basis points to 11.54%.

Concerns about Ramaphosa’s departure are not based on him doing a sterling job but because there’s no successor with anywhere near the credentials that would put investors — and most South Africans — at ease.

Whatever his weaknesses, at least Ramaphosa has kept the economy on a relatively even keel through some of the most historically difficult times over the past few years. He has given the SA Reserve Bank the freedom to raise interest rates early to quell inflation, giving South Africa its best shot at quelling inflation. Under his leadership, the public sector finances at last look like they are heading in the right direction, with the all-important primary budget surplus, when revenue exceeds non-interest spending, expected to be reached in 2023/24, earlier than expected. He’s also made important headway on getting the infrastructure programme up and running — no mean feat in difficult economic conditions.


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Markets don’t like the unknown; with Ramaphosa gone, the unknown is the least of our worries. South Africa’s history of corruption and gross political mismanagement is still fresh in investors’ minds, as are the downgrades to sub-investment grade as a result of the years of looting the state coffers during Jacob Zuma’s presidency.

Fortunately, South Africa will be given some reprieve from the ratings agencies voicing their opinion because they have just made their annual assessments of the state of the economy. There’s little doubt that if these had happened in December, South Africa would likely face downgrades in at least its outlook. But if the worst fears about where the country could be headed come to fruition, the agencies won’t wait for their next scheduled assessment to deliver their judgement on the country’s risk status.

Add to this the prospect of South Africa being grey-listed by the Financial Action Task Force (FATF). The government has made inroads in tightening up the regulatory framework, but there are concerns that rushing through legislation may cause more problems down the line. Also, the FATF report was more critical of South Africa’s implementation of legislation than of the robustness of the legislation itself.

The only possible light in the storm for South Africa over the next month and into 2023 is that there are some positive signs coming through on the global front. Though there are divergent views on whether the global or developed countries are set to head into recession in 2023, if, like Europe, they may already be there, Fed Reserve Chair Jerome Powell gave investors the gift of a likely slowdown in the pace of interest rate increases, with the fed fund’s rate now likely to go up by 50 basis points instead of a hawkish 75 bps. Its measure of inflation eased more than expected in November, and the labour market is looking less inflation-inducing — the one piece in the puzzle that has contributed to making it unlikely that inflation would come down into range until well into 2023.

China’s economic prospects are also looking less dire, with the government indicating it may ease up on its Covid-zero restrictions, which have become untenable and prompting widespread protests of late. If China comes back online, it will make all the difference to the world economy — particularly emerging markets.

There are, of course, still worrying economic trends, with manufacturing sectors still contracting, geopolitics still weighing on the world outlook and energy security still in the balance. The imminent cap on Russian oil by the European Union could upset commodity markets again.

For South Africa, a global economy steadying and settling into below-par growth and easing inflation would have been a cause for celebration. Now, it will only serve to isolate the country further, with investors steering clear of a high-risk investment prospect and directing their funds to other emerging markets, like Brazil, which managed to achieve relative post-election stability this year. BM/DM

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