Yesterday I wrote up on the decision by South African President Jacob Zuma to axe the Finance Minister Nhlanhla Nene in a move that upset not only markets but the general public as a whole. Zuma's lack of understanding to the ramifications surrounding him and his government's policies on the economy has been a bugbear for a number of years now but the move all but confirms that the man is unable to fathom the slightest clue of what he's doing.
After the bloodbath ended at the close of trade yesterday on the Johannesburg Securities Exchange, the various participants were looking at what lies ahead for the economy and what sort of impact such ill thought decisions say about the government executing them.
The Rand
The first measure of the health of a nation's economy is its currency for which it trades in with foreigners. The Rand has been on a weaker footing since the late 1970's and early 1980's as pressure began to mount on the apartheid regime to change their ways by allowing blacks economic freedom from the oppressive laws preventing that.
This trend continued into the age of democracy as the new government had much to prove to the world that it could be trusted to implement the right policies and eradicate the negative effects of the past regime and under the leadership of Thabo Mbeki and Trevor Manuel at the helm, government experienced an unprecedented wave of confidence flooding into the economy which saw the faster growth rate the South African economy has ever seen.
Added to this the Rand finally bucked the trend of going higher when the world economy was sent into shock during the period of 2007/08 Financial Crisis further placing the nation on a good footing going forward. However political power battles between Mbeki and Zuma resulted in the former being booted out in a rather distasteful way.
Once the Rand began flirting with the all important R10 mark to the US Dollar many wondered if Zuma's policies were strong enough to stop it dead in its tracks and prevent it from undoing all the good work done under the reign of the Mbeki Administration. However it wasn't to be the case as the local currency eased its way like a knife through hot butter leaving many questioning if it may begin its ascent to the all time lows last registered in December 2001.
Marching its way from R11.20 to above R14.00 this year put to rest the speculation if the level would be broken or not but the most important part is the consolidatory nature the Rand found itself since 2000 until recently has now been nullified and as a renewed valuation begin to set in at much higher levels.
Interest Rates
The South African Reserve will now be under immense pressure to protect the Rand after previously raising rates four times in the last year, none of which has any bearing on the direction on the local currency which leads me to speculate that the level at which Governor Lesetja Kganyago places interest rates into the market may be much higher than the gradual 25 basis points we've witnessed so far.
This will have disastrous effects on the economy that is barely able to produce 2% economic growth on the backdrop of the mining industry facing a backlash from trade unions and government's inability to resolve the matter that would see the necessary measures put in place to save the least amount of jobs.
If Kganyago is to arrest the destructive path the Rand is currently tearing through at the moment he may be forced to take drastic action, something that isn't unfamiliar to South African monetary policy as was seen during the era of Chris Stols where lending rates peaked at 25% as banks were left mopping up the foreclosures at a dismal rate.
There has been indications from Kganyago that he would defend the Rand with any policy tool he has on hand and went as far as to say he would intervene in the currency by selling off foreign reserves if the need arose. What we've witnessed the past two days is tantamount to carnage and I don't think the SARB would have sat back however had they intervened it may set the precedent that they will do the same in the future leaving the situation more volatile than normal circumstances which doesn't paint a pretty picture.
Trade Balance
With a trade deficit that came in worse than expected no less than a week ago, the situation that is presenting itself only serves to exacerbate it further with imports expected to surge on the back of a weaker currency and exported goods finding foreign buyers with more ease as the prices are cheaper. In effective it should balance itself in the long term by dissuading local buyers to import and spurring exporters to sell products in droves, however we are more concerned about the short to medium term.
As a commodities based economy, South Africa relies heavily on the demand for these goods to fund the imports needed by its own economy. However given the crisis we are experiencing in that sector there has been little refuge to be found and thus resulted in a larger trade deficit than expected. The problem becomes worse when the situation on the platinum belt (platinum being the top commodity exported) in chaos as government continues to pressure mines to continue producing and trade unions demanding a living wage.
This has resulted in a glut in the platinum market with the situation becoming worse as the weeks and months pass by.
Then you have a drought that has hit the agriculture sector of the economy that some are predicting could be the worse in years is affecting the maize production, a staple food for many in the country. Beef prices are dropping because farmers don't want to be keeping cattle judging by the price of feed and the probability that they won't be able to recover their costs but what happens next year when there's no beef to sell. This all weighs on the import of food necessities.
Add this all up and you have the one side producing less revenue than needed to fund the other side that cannot be prevented as people need to eat with the resultant outcome being an overinflated trade deficit that puts strain on an economy already in distress.
Government
Zuma has set a dangerous trend in motion by wielding the axe on probably the most important man in cabinet and placing himself in the firing line of his party after it was reported early on Friday that he had not consulted those in high positions about the move sending even more shockwaves reeling in the financial markets.
What he hasn't realised is his actions now imply that he is willing to place his own personal life before that of the country going as far to secure the finances of the nations in the cusps of his hands to satisfy his own pursuits. This unfortunately doesn't sit well with those who have billion of rands worth of wealth placed in the market.
The uncertainty its created has damaged the reputation of National Treasury that I wouldn't be surprised to see Zuma being recalled which would likely face stiff resistance by himself and loyalist. This would give the ruling party no choice but to impeach him which I believe would be the necessary action to instill confidence back into the financial system.
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