Chronic corruption is baked into SA’s fundamentals
Coronation Fund Managers chief investment officer, Karl Leinberger says that President Jacob Zuma’s shocking move to fire finance minister Nhlanhla Nene is “profoundly negative” for the country.
“The market’s reaction has been decisive and brutal,” Leinberger said in a note to investors, “with good examples being the currency selling off by 9%, government bonds by 12% and local banks by around 20%.”
However, while the media has been focused on the implications of corruption in the public sector, Coronation believes that the real problem lies with what this means for fiscal discipline.
“Corruption is a cancer that corrodes both the effectiveness and efficiency of the public sector and undermines the economy greatly. However, we think that chronic levels of corruption were already baked into SA’s fundamentals,” Leinberger said.
“The greatest consequence of the announcement, in our view, is what it means for fiscal discipline. Throughout SA’s more recent challenges, the SA government has steadfastly remained committed to living within its means. We believe that this is now at risk.”
Impact on the economy
Coronation noted that foreign capital owns around 30% of SA Government bonds and 40% of JSE-listed equities.
Further, the country runs a current account deficit of around 4% of GDP. “The risk of a vicious negative cycle is obvious,” Leinberger said.
“A weaker rand sparks inflation, which forces interest rates higher. In a consumer-driven economy this will further undermine economic activity and result in even more job losses.”
“Investment levels will fall further and with the currency acting as our release valve, the rand would continue to weaken. Ultimately the greatest price for all of this will be paid by the poor, who have no defence against a shrinking job pool and high inflation. While high inflation may hurt the wealthy, it would be devastating to the poor.”
“Only the flux of time will reveal the full significance of the decision and whether or not some lessons are learnt before it is too late. At this stage, however, we see this as a watershed moment, more likely to be interpreted as Jacob Zuma’s Rubicon speech rather than just another isolated firing of a government minister.”
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