In what is being described as a Rubicon moment, economist Gerhard Lampen has provided 10 potential implications of president Jacob Zuma sacking finance minister, Nhlanhla Nene.
The presidency didn’t elaborate on the move, but announced Nene’s replacement, ANC member of parliament, David Van Rooyen.
The rand has lost more than 8% of its value against the dollar since the presidency’s announcement on Wednesday, touching R16 against the greenback.
Speaking to Bloomberg, Investec Asset Management fund manager Malcolm Charles described the situation as a “self-induced crisis”, in which investors are “voting with their feet” and taking money out of the country to other markets.
Lampen, head Sanlam iTrade Online, said: “There can be only one explanation for this hasty move to replace Nene. The SAA board has until 21 December to negotiate with Airbus or default.
“Nene refused SAA board permission to renegotiate the contract which had a big saving included which will fall away if not complied with. That is why Zuma hastily replaced Nene with an unknown person who will toe the line. The other issue was of course Nene’s resistance to the Trillion nuclear deal.”
What are the implications of Zuma’s actions?
- We will get a downgrade to junk status by Rating Agencies which means that our debt will become more expensive. In fact our Bond yields are already reflecting junk status, we don’t have to wait for the agencies.
- Interest is already the biggest expenditure item on our budget. That will rise, making the Budget Deficit even bigger.
- That means tax increases next year is a certainty, income tax and even VAT.
- The Rand is in free-fall. This will push up inflation which will cause interest rates to rise.
- Higher taxes and interest rates will hurt consumers, sending South Africa into a recession in 2016. Retail shares and Banks will be at the forefront of this decline.
- The SA Inc part of the JSE (Industrials and Financials) will enter a Bear Market and the bottom cannot be called.
- Even Mining shares, traditionally considered Rand-hedges, will not protect investors because foreign investors will sell to get out of South Africa.
- Foreigners own more than 50% of the JSE and a big percentage of our Bonds. Their selling will put more pressure on the Rand. Many US and UK Pension Funds invested here are not allowed investments in countries with Junk status. They will have to sell and are already selling.
- Our Current Account deficit is big, 4% of GDP. This deficit can only be funded by portfolio flows and investments by foreigners because we have very small foreign currency reserves. This has now turned to outflows which means the Rand must take the full pain of adjustment. Raising interest rates to 25% and trying to protect the Rand is useless as 1998 showed. The Rand can go anywhere.
- Real Rand-hedges will go up as the Rand weakens. They are ETFS like the DBX trackers, Naspers, Richemont, BAT, Steinhoff and many more.