South Africa’s Ship Captain Capsize
South African bonds and stocks ended 2015 with MSCI and EMBI losses, with President Zuma’s serial Finance Minister reshuffle upsetting investors and key ANC party backers alike ahead of local elections and signaled sovereign junk rating assignment in the coming months. Previous incumbent Gordhan returned to the post with a fiscal prudence pledge “to stabilize the ship” after an unknown backbencher was temporarily tapped as Nene’s replacement to a business and political firestorm after his sacking for refusing state-owned airline and nuclear station spending. Another well-respected former Finance Minister, Trevor Manual, claimed the episode had “completely broken” cabinet trust as the Treasury had been largely immune from scandal and presidential interference to sustain foreign bond inflows to cover the 4.5 percent of GDP current account gap. In the immediate aftermath of the firing local bond yields jumped 100 basis points and the rand slid to 16/dollar. Economic growth is only 1 percent and public debt is in the 50 percent of GDP range counting contingent liabilities like power company rescue. Chronic electricity shortages are another blow to the mining sector suffering from commodity price collapse, as leader Anglo-American announced tens of thousands of worker layoffs with official unemployment already at 25 percent. The ruling party continued to support the President, whose term lasts through 2017, although corruption probes linger over state fund use for home renovations. He seized the diplomat’s role at the annual China-Africa summit in Johannesburg where Beijing promised another $60 billion in projects and bilateral free trade pacts.
Zimbabwe’s President Mugabe was a headline speaker and promoted the renimbi as a currency alternative after $40 million in Chinese debt was cancelled. Growth there is also just 1 percent, and a recent IMF visit affirmed that arrears and indigenization law clearance are prerequisites to re-engagement. The MSCI frontier component was off 40 percent in 2015 as successor jockeying seems to favor security hard liners with scant economic policy interest and knowledge to engineer a turnaround. The opposition Movement for Democratic Change has split into factions, and technocrats are increasingly prominent but have been unable to rally youth discontent. Botswana shares have declined single digits with diamond industry retrenchment, with the joint venture with De Beers trimming one thousand jobs as diversification calls intensify. A World Bank report noted that the gem was 80 percent of exports and a “shallow” private sector, as competitor India takes more of the cutting and polishing demand.
Kenyan securities likewise reeled on alleged missing proceeds from the recent Eurobond and elated graft charges resulting in official dismissals. The new central bank head, a member of the Opus Dei sect donating his salary to charity, has tightened monetary policy to quell inflation and protect the shilling and moved to consolidate the sector after 150 percent expansion the past five years. Smaller banks have been closed and subject to tougher enforcement as the dozen foreign ones rethink their presence and strategy. Barclays, with a far-reaching century-old continental network and $65 billion balance sheet, may shed assets under incoming chief executive Staley with lagging returns and personnel struggles at its main South African subsidiary due to shake up the colonial era vessel.