South Africa again hit by economic and fiscal uncertainty

South Africa’s finance minister has been summoned to appear in court, news that threatens to unwind recent economic progress and throws fresh uncertainty over the country’s investment grade status.

South African rand
Source: Bloomberg

The South African economy has been showing signs of an improvement recently, following strong second-quarter Gross Domestic Product (GDP) data, improving inflation data and a healthier looking current account as a percentage of GDP. This has been further supported by ratings agencies giving the country breathing room earlier this year by maintaining the region as an investment grade destination.

But news that finance minister Pravin Gordhan has been summoned to appear in court on 2 November, where fraud charges relating to his former South African Revenue Services employment are likely to be laid, is set to unwind much of the progress the country has made in the short term.

The timing and motives of the summons are subject to question. Once again Mr Gordhan sees allegations arise shortly before he is set to release his budget speech and ahead of the sovereign rating review scheduled for early December this year.

Public protector Thuli Madonsela has said 'either we have a minister of finance who is a fraudster or there are shenanigans and either way we should be concerned'.

Tuesday’s market moves gave a clear indication that Gordhan is popular among the investment community, and a taste of what to expect if the finance minister is forced to leave office. On the currency front, the South African rand is at the mercy of disinvestment, as witnessed on the IN_USDZAR chart which shows the domestic currency depreciating more than 4% in a single day following the news of the court summons for Mr Gordhan.

Gordhan1_SMALL

The weaker currency was echoed in moves in banking stocks listed on the Johannesburg Stock Exchange, and to a slightly lesser degree in retail stocks. The depreciating rand would equate to higher inflation and an increased likelihood of further rate hikes within the country. An already highly indebted consumer in turn will have less to spend and will be more likely to default on existing debt. 

Gordhan2_SMALL

The larger issue at hand and the one markets are pricing in is the likelihood of South Africa realising junk status in December. Instability in treasury marred with political uncertainty could tip the scales towards a sub-investment grade rating in December, which will see South Africa as a less appealing, higher risk investment destination. This would incur higher borrowing costs for government, making less funds available to grow the economy and employment.

Slow economic growth, and rising inflation caused by the current drought and an increase in imports, rand weakness and rising oil prices, combined with the now added risk of political uncertainty and fragmenting faith in South Africa’s once revered treasury, is now perhaps skewing in favour of a sub-investment grade destination by year-end.

While the ratings crisis was averted earlier on in the year through a coordinated effort between government and business, these efforts were spearheaded by Mr Gordhan. With the current allegations and possible implications to follow for the finance minister, one wonders whether there will be leadership to help keep South Africa as an investment grade destination consideration. 

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.