South Africa's Finance Minister summons and possible implications on markets

Taking a closer look at possible market implications after South African Finance Minister's summons.

With strong Q2 Gross Domestic Product (GDP) data, improving inflation data and a healthier looking current account as a percentage of GDP, the South Africa economy has been looking like its showing signs of mending in the near term. This has been further supported by ratings’ agencies giving the country breathing room earlier this year (in terms of maintaining the region as an investment grade destination).

 

Tuesday’s news that Finance Minister, Mr Pravin Gordhan, had been summoned to appear in court on 2nd of November where fraud charges (relating to his former South African Revenue Services employment) are likely to be laid, now looks to unwind much of the progress we have made as a country in the short term.

 

The timing and motives of the summons are subject to question. Once again the Finance Minister (as he himself has pointed out) see’s allegations arise shortly before Mr Gordhan is set to release his budget speech and ahead of the sovereign rating review scheduled for early December this year.

 

Thuli Madonsela (Public Protector) has said it best "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 have given us a clear indication that Mr Pravin Gordhan is popular among the investment community, as well as a taste of what to expect if the Finance Minister is forced to leave office.

 

On the currency front, the Rand is at the mercy of disinvestment, as witnessed on the USD/ZAR chart which shows the domestic currency depreciating more than 4% in a single day following the news.

 

The weaker currency was echoed in moves on JSE Listed Banking counters as per the chart below, and to a slightly lesser degree in retail counters. 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 spend available and will be more likely to default on existing debt. 

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 the 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 essentially 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) with the now added risk of political uncertainty and fragmenting faith in South Africa’s once revered treasury, is now perhaps skewing in the 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 Finance Minister; 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.

 

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material 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 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. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.