Real Estate Investor Magazine South Africa Real Estate Investor Magazine - July 2017 | Page 61

successfully fend off this particularly blunt and ill-
conceived attack, it is a worrying indicator of possible
attacks to come. Our Reserve Bank has been one of
the few bastions of good governance, it’d be a shame
if we fail to protect its integrity.
The upcoming ANC policy conference (30 June to 4
July) has no doubt influenced Mkhwebane’s remarks,
as many in the ruling party and government want to
demonstrate their support for their respective ANC
candidates. This latest move from the Public Protector
puts her firmly in the radical economic transformation
(Zuma’s) camp. With the ANC so divided, we can
expect more grandstanding like this leading up to the
December elective conference as political jockeying
intensifies.
Just as political rhetoric escalated in 2010 and again
in 2012 at Polokwane, so too will it intensify in the
run up to the ANC’s elective conference. Be braced
for some outlandish statements and some serious
strain on investor patience as politicians all attempt
to out “radical economic transformation” each other.
This will continue to undermine confidence and
South African specific risk will rise.
Searching for answers
While there are signs that Zuma’s camp is on the run,
and that the rule of law can still be relied on, it’s hard
not to get increasingly cynical when staring down the
barrel of a recession. The big question is how do we
revive confidence in the economy, both locally and
abroad?
We cannot follow the path of Zuma’s administration.
If we do, Malusi Gigaba and his deputy Sfiso Buthelezi
will face an impossible task; government’s radical
economic transformation is ill-thought out and has
very little to it other than populist rhetoric. Further,
the way these two Zuma-loyalists were appointed has
destroyed the trust between business, government
and labour. On top of this, Gigaba is associated with
state capture. How is he to lead a concerted effort
between private and public in South Africa?
Gigaba has even been accused of having facilitated
state capture in state-owned enterprises while he was
Minister of Public Enterprises. He is unsuitable to the
finance ministry. Rating agency Moody’s highlighted
South Africa’s deteriorating institutional strength as
one of the reasons it downgraded our credit rating
to just above junk, and with Gigaba heading up the
National Treasury, a downgrade in December is
looking likely.
When investors and agencies assess our political
situation, they will compare Gordhan and Gigaba,
as well as former deputy minister Mcebisi Jonas and
Buthelezi. Buthelezi is associated with improperly
benefitting from Prasa tenders, while Jonas is known
www.reimag.co.za
for rejecting a bribe from the Guptas. Gigaba,
meanwhile, has long been seen as a tow-the-line Zuma
loyalist, while Gordhan was fiercely independent. It
doesn’t take a genius to predict how these assessments
will play out.
Holding out hope
So why the strangely strong Rand? The current
economic crisis is disguised by hot money. Billions of
Dollars have been flowing into emerging markets and
are propping up financial markets. In South Africa’s
case, we are seeing the Rand and government bonds,
surprisingly, doing well. This phenomenon is driven
by fund managers and their insatiable appetite for
yield, compelling them to mo ve flighty capital from
developed to emerging markets. Meanwhile, more
sustainable investment in production by private
companies is in a prolonged period of decline due to
an internal crisis of confidence.
This Rand pseudo-strength might change if South
Africa gets its Rand-denominated debt downgraded
to junk status by Moody’s. Such a downgrade would
mean we drop out of the Citibank World Government
Bond Index. This would trigger automatic sales
of between USD 7 billion and USD 10 billion in
government bonds, according to Colin Coleman,
head of Goldman Sachs’ South African office.
So, brace yourselves for a roller-coaster ride to the
ANC elective conference in December. This will
be the watershed – either a 10-year continuation of
destructive politics of patronage, or a return to more
moderate and skills-driven economic policies. In the
medium-term there will be a continuing trend where
the Rand is losing ground against its emerging market
peers.
When assessing the medium- to longer-term
sentiment and fundamentals, my view remains Rand-
negative. In the short term, however, the Rand will
be influenced by the global backdrop as forces in the
developed world create their own volatility.
There are other, longer-term, trends that are undermining
confidence in South Africa. The daily scandals that show how
segments of the ruling party are milking the economy through
dodgy deals and mismanaged state-owned enterprises have hit
us hard internationally. South Africa’s private sector companies
– the biggest creators of wealth, jobs and state revenues – also
have very little trust in the government. Ordinary tax-paying
citizens are also fed up. Without private tax payers, and without
international investors, the state will eventually collapse.
RESOURCES
Sable International
JULY 2017 SA Real Estate Investor
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