There are only three things that will bring long-term reform to South Africa – and none of them will happen until the country effectively hits rock bottom, market research group Nomura says.
In a market update on South Africa Nomura research analyst Peter Attard Montalto responded to frequently asked questions relating to the current war between finance minister Pravin Gordhan and president Jacob Zuma, and its effect on the country.
Nomura holds the position that Zuma is actively trying to rein in Gordhan and get rid of him so that he can capture National Treasury and continue his policy of patronage and tederpreneurship, which has underpinned his presidency.
According to Attard Montalto, the key focus of everything that is happening is pointing toward the ANC’s elective conference to be held in 2017 (if not sooner), which will ensure Zuma’s legacy can continue to 2019 and beyond.
As it stands, Nomura sees two camps within the ANC – the pro-Zuma camp, and the reformers. The group estimates that Zuma supporters make up 60% of the National Executive, and thus have control, but there is enough resistence that there is a stalemate.
“The ‘war’ that is ongoing will continue in a stalemate until one side can land a decisive blow,” Attard Montalto said.
That blow, however, may be the final knock that will push South Africa off the proverbial cliff.
According to Nomura, the good news is that it is possible for South Africa to turn itself around. The bad news is that the country will have to hit rock bottom before any that can happen.
“South Africa is still in need of a real and substantive shock to turn it onto a path of reform. Losing more jobs per capita than any other market in 2009 wasn’t enough of a shock, nor was loadshedding, nor Nene-gate, nor Nkandla.”
Pravin Gordhan being given the boot, may just be it, the group said.
But it won’t just be one event, Attard Montalto warned, saying that a series of shocks would likely follow in a wave:
- The reshuffle or exit of Gordhan in itself would be the first shock;
- This will be followed by digestion of his replacement candidate (as was seen during NeneGate);
- This would be followed by a downgrade from S&P rapidly after;
- Followed by negative statements from the other two agencies;
- Treasury, under new leadership would sign of guarantees to SOEs like SAA and sign off on the nuclear deal, which would be substantially negative balance sheet shocks for the market;
- We would then have negative data and a likely recession;
- Another risk is that key personnel would leave the NT which would lead to a deeper erosion of its institutional quality;
- Ultimately this would lead to a rand crash, that South Africa would not recover from as was the case when Nene was fired.
According to Nomura, for any hope of reform in South Africa, the country has to make it through an ANC elective conference with a reformer (‘anti-Zuma’) candidate at the helm.
The only two other scenarios would be where a DA or DA-led coalition wins in the 2019 national elections, or there is a significant split in the ANC.
“All these events we still see as less likely without a shock, and our baseline remains that the status quo will continue, which is not investor-friendly,” he said.
“If a shock that fundamentally shifts the centre of gravity does occur within the ANC we would become more optimistic.”