South Africa’s Disguised Anti-Fraud Frown

South African shares and the rand steadied as abuse charges were dropped against Finance Minister Gordhan and President Zuma won a narrow no-confidence parliamentary vote victory with record ANC abstentions after the courts reinstated hundreds of corruption counts against him. A separate judicial inquiry into ties with the influential Gupta family warned of “state capture” by insider interests and both the ruling party leadership and political opponents have demanded a wholesale purge in the government’s top ranks to restore economic confidence. GDP growth will be less than 1 percent this year and the budget deficit will stay at 3.5 percent under the new medium-term plan, setting the stage for an end-year sovereign ratings downgrade to speculative. Lower  tax revenue  will be offset by asset revaluation and other measures without major state enterprise stake sales, and the blueprint is murky on further guarantees and recapitalization for power giant Eskom which has already been demoted. Investment-grade fund managers may dump billions of dollars in holdings, which could cramp external bond performance already lagging the EMBI’s double-digit gain. The fractured domestic picture coincides with further signs of the regime endgame in Zimbabwe, as even the security forces express discontent over salary squeezes with the chronic dollar and goods shortages. Under a new currency plan the government will seize bank accounts and replace greenbacks with artificial IOUs, as international reserves may be exhausted and the fiscal deficit is estimated in the 10 percent of GDP range. However $100 million in arrears to the IMF were repaid, by using escrow proceeds in the SDR account, but $1.5 billion is still due the World Bank and African Development Bank. The Fund acknowledged the clearance but stressed that financing access remained off the table, pending a “strong reform agenda.” The stock exchange has been one of the only safe havens since the dollar printing and a Sub-Sahara Africa MSCI pacesetter, even though foreign investment is negligible.

Nigeria in contrast was down 30 percent through end-October as the naira drifted toward 500/dollar in the free market, which has been the target of unrelenting central bank rule changes and raids. It has propelled inflation toward 20 percent with the economy in recession despite global oil price rebound. President Buhari promised launch of a comprehensive recovery plan after a year and a half in office, and agreed a $5 billion settlement with previous joint venture partners as the state petroleum company undergoes restructuring. With 50 percent currency depreciation since June’s flotation and absence of a coherent adjustment program, multilateral lenders have hesitated to offer billions of dollars in requested balance of payments aid. Banks are again ailing, and the AMCON bad loan arm is in need of additional resources as lawmakers continue to delay budget approval.  Portfolio investment has stalled with bond index expulsion as MSCI ponders stock suspension, and FDI may have been set back $400 billion the past year, according to Nigerian-American Chamber of Commerce calculations. The President has disappointed business supporters with his authoritarian management style and anti-corruption and terror focus while poverty and structural issues fester. They argue that the resumption of Delta rebel activity should be met with policy solutions beyond his soldier’s instinct as financial battles complicate conflict.

Posted in