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November 20, 2018

Go Limit Short South Africa

Bloukrans Bridge, Tsitsikamma, South Africa./FILE
Bloukrans Bridge, Tsitsikamma, South Africa./FILE

Who can forget that moment when Nelson Mandela walked out of prison and just about everyone in the World was watching? The Rainbow Nation was born and we all knew at that moment [even President De Klerk] that we were watching the first president of a free South Africa and not a long-term prisoner blinking in the harsh sunlight. South Africa is the biggest economy in SSA [it lost the lead briefly to Nigeria but has regained Top-Dog Status], the Rand is the nineth most traded currency world-wide and therefore South Africa is not a tucked away African country but the big cheese. Events in South Africa unfold on the World-stage. Investors who might find buying T-Bills in Harare a stretch, will quite happily trade the Rand, buy a share or two at the JSE. South Africa is on the radar of global investors in a way other Sub-Saharan countries can only dream about.

President Jacob Zuma by recalling his Finance Minister Pravin Gordhan from an international road-show was sending a message about who is the top-dog. From the moment of the recall through his summary dismissal alongside his deputy and eight other cabinet members, South African assets have gotten hammered.

The South African communist party said in an emailed statement on Friday. “Once more it lays bare a disturbing reality. Increasingly our country is being ruled not from the Union Buildings, but from the Gupta family compound.”

The ANC sits at a cross-roads.

Julius Malema the articulate ''fire-brand'' leader of the EFF said to Power FM

''When I was sitting there looking at old veterans, I realised that the real ANC is outside the ANC with no role to play'' For now its seems the ANC has been personalised in the court of King Zuma and folks are more concerned about their own positions being liquidated rather than the party's position.

I will turn to the market reaction which was violent momentarily. President Zuma accused Gordhan and his deputy, Mcebisi Jonas, of setting up secret meetings to start what was called operation check mate to undermine Zuma. He (Zuma) lay the charge that Gordhan was working in cahoots with ''white monopoly capital.'' President Zuma struck in the dead of night when most folks are tucked up in bed. In the space of 15 months, President Zuma has now fired two very competent finance ministers. Competency is clearly not one of the terms of reference. This Kamikazi Treasury midnight ''smash and grab'' is what it is and if you ever want an example of ''Political'' risk this is as near a perfect example you are going to find. It is clear also that Gordhan and Jonas were doing some highly effective blocking and tackling at the Treasury [Nuclear Energy, State Parastatals, the Guptas].

I was at a Financial Times Africa conference last year at Claridge's and the FT's Lionel Barber asked Pravin Gordhan

"When you communicate with @SAPresident about implications of a downgrade, does he understand?"

South Africa GDP has been in the slow lane around or close to a 1% GDP expansion rate. The currency was the second best performing currency in 2017 [after the Mexico Peso]. The Indian Ocean Dipole had distributed much better rains down South [when Agriculture does well in Africa the Economy tends to see better diffusion] There were some green shoots. And I suspect that was the story that Gordhan was telling international investors. All of that was before the Night of the Long Knives. The Rand crashed -7.5% last week and had its worst week for more than a year. I expect it to fall further. Charlie Robertson of Renaissance Capital tweeted

''Each 1% fall in the ZAR shrinks South Africa's GDP by about $3bn. Perhaps this is the economic transformation Zuma is seeking?''

I expect a downgrading to Junk Status [2 notch downgrade] in very short order. This downgrade will accentuate the negative Feed-Back Loop as investors hit the eject button. A Ratings downgrade will effect big government parastatals like Eskom.

The new Finance Minister said "The principle stands that it will be implemented at a pace and scale that the country can afford ... I don't think we will or should try to be reckless about it"

Sell everything and go Limit Short.

Aly-Khan Satchu is a financial analyst

 

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