In another twist in the saga surrounding the influence of shady business figures on former President Jacob Zuma’s administration, South Africa’s finance minister, Nhlanhla Nene, abruptly resigned on October 9.
Speculation that Nene could be ousted had been growing ever since it emerged in an anti-corruption investigation that he met the shadowy Gupta business family (close associates of Zuma) on several occasions, something Nene previously denied.
Global financial markets tend to be anxious about changes to this highly politicized cabinet position: South Africa has had five finance ministers in the past three years.
Anticipating a repeat of the controversial dismissals of finance ministers in 2015 and 2017, when the currency tanked and South Africa’s debt was downgraded to “junk,” markets were jittery, with the rand weakening to 15 ZAR to the US dollar, having averaged 14.6 over the preceding month.
However, in a break with past reshuffles, Nene’s resignation would turn out to be a positive development: His replacement is a reformer who understands the need to inject confidence into the economy.
While MNCs should not expect a resolution to South Africa’s economic woes overnight – and should thus set moderate expectations for 2019 – they can be confident that pragmatism will guide government policy and the budget, due to be announced later this month.
Different president, different priorities
The political context has changed substantially since last year. A pro-business president, Cyril Ramaphosa, is now in office, and his reasons for supporting Nene’s resignation are very different from Zuma’s motivation for sacking his then finance ministers in 2015 and 2017.
Whereas Zuma’s reshuffles were about installing pliant ministers who would do his bidding and rubber-stamp corrupt deals benefitting his cronies, Ramaphosa’s aim is to clean up the government’s image and restore faith in South Africa’s institutions.
While Nene himself has not been accused of corruption, his resignation amidst the “Gupta scandal” probe nevertheless offers an opportunity for a clean break with the past.
Ramaphosa’s choice of successor – former central bank governor Tito Mboweni – further reflects these changed circumstances. Having served in former president Nelson Mandela’s first cabinet, Mboweni, in contrast to Zuma’s favored appointees in 2015 and 2017, is a trained economist and is respected by investors and the local business community.
Financial markets are reflecting this confidence. The rand, having weakened in the days leading up to Nene’s resignation, changed direction upon the news of Mboweni’s appointment, rising by about a percentage point. Local bond markets also strengthened.
A challenging brief
Mboweni faces a difficult task. South Africa’s economy is in a fragile state and vulnerable to downside risks.
FSG expects the market to grow by a meager 0.4% YOY in 2018 and 0.9% YOY (down from 1.6% and 2.1% expected previously). International institutions such as the IMF and World Bank, as well as commercial banks and credit rating agencies, have also downgraded their growth expectations.
Mboweni’s immediate task will be to develop a credible plan to stabilize South Africa’s public finances.
With tax revenues falling due to weak growth, there is a growing risk that the government’s debt load could become unmanageable. Further credit downgrades are possible, which depending on their severity, could drive significant capital outflows and sharp rand depreciation.
Executives should thus monitor closely how rating agencies respond to Mboweni’s first key speech as finance minister – the Medium-Term Budget Policy Statement (MTBPS), scheduled for October 26.
What to expect from the budget
Mboweni’s MTBPS will also likely contain pointers on how customer demand and the operating environment could unfold in 2019:
- Government spending: B2G demand is unlikely to accelerate overall, though how spending is prioritized will shift, with greater emphasis placed on infrastructure development, backed by more resources through a new US$ 27-billion infrastructure fund
- Consumer outlook: The MTBPS is likely to contain a mixed bag of measures impacting consumers. The extension of an incentive for firms to hire young employees could help lower-income segments, through overall demand growth will be lackluster amid rising inflation
- Operating costs: Mboweni is likely to point to tax increases to raise more revenues, including fuel tax hikes and higher duties of a range of products. The impact on overall operating costs will be mitigated somewhat by policies reducing port, freight, and data charges.
While Mboweni’s appointment is on the whole good news for MNCs, executives should be cautious about what this means for South Africa’s longer-term outlook.
The ruling party’s leadership still contains numerous populist figures in powerful positions, limiting Mboweni’s scope to push growth-enhancing reforms. Similarly, the fact that the market is heading towards a general election next year precludes any bold moves that could prove politically unpopular.
If you are a client, track the latest developments in the market using South Africa LiveView dashboard or reach out to your Client Relationship Director to discuss strategy implications for your business. If you are not a client, but would like advice on your SSA strategy, please contact us to learn more.
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