Shuffling three finance ministers in five days generally unsettles markets. In South Africa, the latest choice, Pravin Gordhan, is widely seen as market-friendly, but the quick turnover in a weakening economy raises questions.
The shuffle began on 9 December when President Jacob Zuma decided to remove South Africa’s respected finance minister and replace him with a political unknown. The move came as a shock to financial markets, and the reaction was negative – essentially a repricing of all South African assets. That reaction proved strong enough to force a capitulation by the governing ANC (African National Congress), and under considerable pressure, President Zuma then appointed Gordhan, who previously served as finance minister during Mr. Zuma’s first term (2009-2014).
Prior to all this, investor sentiment had already begun to sour on South Africa, given its slow but steady deterioration in fundamentals. In the third quarter, GDP growth came in at a meager 1.2% over the prior year – the weakest pace since the global financial crisis and recession. Meanwhile, inflationary pressures have been creeping higher, and inflation expectations one and two years out have breached the upper bound of the central bank’s inflation target of 6%.
Other indicators have also shown evidence of stagflation, including consumer confidence, which plunged in the fourth quarter to the third-lowest level in 20 years. But the biggest reflection of the deterioration in economic conditions came on 4 December, when Fitch cut the country’s sovereign credit rating to BBB-, the second agency to rate South Africa only one notch above high yield. President Zuma’s ministerial changes added unnecessary volatility to assets that were already trending weaker.
Zuma’s latest pick for finance minister was welcome and brought a fair degree of price appreciation in South Africa’s assets, as many believe Gordhan will maintain the existing fiscal program. Similarly, many believe South Africa’s central bank is credible and independent; it has been gradually increasing the target interest rate to help offset the inflationary impact of a weaker rand.
The sell-off during the minister change restored value in some segments of the yield curve, especially as 147 basis points of rate hikes are now priced in for 2016. However, markets generally don’t respond well to unexpected political decisions. Despite the asset repricing, we are cautious on investment in South Africa and want to see if the country can maintain a prudent approach to fiscal policy amid what is now a more challenging political backdrop.