On My Mind – Getting SA
back on course
An unguided missile. We’ve become used to this epithet hung on our president, Jacob Zuma, as he continues to shoot holes in the hull of the boat we call South Africa Inc. Holes that were in no way plugged by the lacklustre maiden mini budget speech by Finance Minister Malusi Gigaba in Parliament on Wednesday. With the Zuma regime still resolutely clinging to the helm, many investors are now pinning their hopes on the ANC’s elective conference in December. We believe this may be premature and short-sighted, however – we may well have to hold out a while longer before we can get our country back on course.
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President Zuma clearly continues to believe he is untouchable. On the other hand, with his party’s elective conference just around the corner, perhaps he’s all too aware that the writing may finally be on the wall for him and his acolytes. Either way, it doesn’t require rocket science to conclude that his surprise (umpteenth) Cabinet reshuffle last week was a last-ditch attempt to protect his and his cronies’ own interests.
Although the Russians have denied any influence by their president, Vladimir Putin, President Zuma’s appointment of former State Security Minister David Mahlobo as our new Energy Minister certainly raised an eyebrow or two about the proposed R1 trillion Russian nuclear deal – as well as a R5 billion deal with a Russian oil company to explore oil and gas blocks off South Africa’s coast.
The sad reality is that despite the best efforts of South Africa’s business sector and civil society groups, while President Zuma continues to blunder on unchecked, there’s little hope that our floundering economy can be steered out of the doldrums and back into the trade winds.
The continued policy uncertainty, lack of clear strategy to stimulate economic growth and political instability are the main factors scuppering any chance we may have had of joining other emerging markets in reaping the benefits of the synchronised global economic recovery. Unfortunately, in his Medium-Term Budget Policy Statement (or mini budget) on Wednesday, Finance Minister Malusi Gigaba did nothing to address these shortcomings.
Severe challenges and shortfalls
The Minister painted a rather grim picture of the severe challenges facing our economy. Our growth forecast for 2017 has been adjusted downwards from the 1.3% projected at the time of his predecessor’s budget speech in February, to 0.7%. We’re also facing a staggering revenue shortfall of R50.8 billion and national debt approaching 60% of gross domestic product (GDP). And yet, despite Minister Gigaba warning that state-owned companies have become a ‘major fiscal risk to the country’, further bailouts to the tune of R14 billion to some of these embattled institutions are on the cards.
While these dismal figures do nothing for investor confidence, neither did the Minister’s failure to offer us anything by way of a radical economic strategy to turn the tide around. In this respect it was in line with his recently announced 14-point ‘inclusive growth plan’ to boost the economy, which also lacked substance and had no clear plan for implementation. All in all, it was an uninspiring speech, which didn’t do his credibility as Finance Minister any favours. This sentiment was echoed by a distinctly unhappy rand, which dropped sharply in response.
Unconvincing, empty words
The bottom line is that mere lip service (yet again) isn’t going to fix the leaks in our boat. The international investment community is also tiring of unconvincing, empty words not backed by action. During a working visit to New York last week, it became clear to me that the one thing foreign investors are now pinning their hopes on is the possibility of an anti-Zuma camp win at the end-of-year elective conference.
More than one analyst I spoke to indicated that if Team Zuma remains behind the wheel (read: if his ex-wife, Nkosazana Dlamini-Zuma, is elected), this will lead to a big sell-off of South African equities, as the risk trade-off is just not worth it. South African bonds might still attract investment for as long as they remain at investment grade – but it remains to be seen how long this will continue to be the case.
Political analysts well versed in the inner workings of the ruling party are fairly unanimous in their view, however, that presidential hopeful Cyril Ramaphosa has little chance of pipping Dlamini-Zuma to the post come December. It’s clear that the Zuma side has done its homework – the leadership race is very much a ‘battle of the branches’, and Ramaphosa currently doesn’t appear to have the support he needs to succeed Zuma as ANC president.
In the meantime, South African and international investors alike will be faced with continued uncertainty as our economic fortunes continue to move south, thanks in no small part to the unconvincing and disappointing performance of our new Finance Minister.
The next challenges for our fragile, beleaguered currency will no doubt be the fresh spate of reviews by the rating agencies at the end of November and the ANC’s leadership contest in mid-December. To my mind, the outcomes of these two events are likely to be negative, and won’t bring the relief investors are hoping for. It may still be some time before we can get our boat watertight and back on course.
A note on investments
What does all this mean for investments? The important thing to remember is that investors need to be sufficiently diversified offshore for the short and medium term, to allow for hedging against both political and economic risk, as well as further currency depreciation. We’ve already factored in the potential fallout that both additional downgrades and the ANC’s elective conference may bring about, and our clients’ portfolios are appropriately positioned regardless of the outcome of these events.
Read more about the different ways SPW can assist you in accessing the global market here.