Optima Brokers

Specialist Financial Planning

The Zuma Shock

Jan 13, 2016

We would like to welcome back all of our clients to 2016 and hope that it is a great year for us all.

 

While you were away, much has transpired in our economy, headlined by the shock removal of Minister Nene by Jacob Zuma. The surprise announcement was not received well by markets, with an estimated R500 Billion in value, being wiped off since the debacle. Sadly, the reappointment of the respected Minister Gordhan does not signal an end to the issue and instead the global economy is looking at us very differently. One would hope that something to this degree will initiate much needed change in the ruling party – time will tell. Brian Kantor recently summed up the position eloquently, backed up as always by the numbers.

 

We have summarised the salient points from a recent article, which succinctly summarises what has transpired, by Professor Brian Kantor - Chief Economist and Strategist at Investec Wealth.

 

  • Now that the markets have had time to digest the madness, there have been implications on our currency, bond and equity markets.
  • The Rand has since depreciated against the Dollar by a further 18%. 

  • Referred to as the “Zuma Shock”, we are now seen as permanently more risky than Russia and Brazil (Credit Default Swaps Spread).
  • We are thus considered by the global market place as JUNK already!
  • The much talked about downgrade now seems a mere formality.
  • If the South African government cannot urgently convince the global finance community that drastic fiscal improvements are being attended to, then this will prove very costly to SA Taxpayers as they start to fund more expensive national debt.
  • The Rand will continue to be under pressure; however the “Zuma Shock” is permanent and has significantly undermined the Rand henceforth.
  • The Government however is under few illusions as to South Africa’s reliance on foreign inflows.
  • It is hopefully then this that will act as the catalyst to drastic political and or economic change.
  • One positive amongst a swath of negative is that given the low base we now find ourselves in, even the smallest of positive news could make a material difference.
  •  

What could be done to change global perceptions?

 

  • Assurances that SA tax base can withstand the possible cost.
  • Reduction in government spending, specifically the civil service bill.
  • Indications of improved growth of the SA economy.
  • Prof Kantor notes however that reduction in Government spending in certain areas is more realistic in the short term than a turnaround in our local economy.
  • A slowdown in the usual suspects – strikes and policy interventions.

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