At the end of March, South African President Jacob Zuma reshuffled his cabinet overnight, replacing most of his ministers and deputy ministers with supporters and political allies, including his respected finance minister, Prabhan Gordhan.
South Africa's currency, the rand, came under pressure after the restructuring, with rating agencies S&P and Fitch downgrading South Africa's credit rating to junk shortly thereafter.
Meanwhile, thousands of South Africans flooded the capital Pretoria on Wednesday in the second major Zuma protest in less than a week.
Against this backdrop, South Africa has been suffering from sluggish economic growth for some time. One particularly grim statistic is the unemployment rate, which officially has hovered around 25% in recent years (youth unemployment is held at an even higher figure).
Markets are therefore trying to parse what the growing political crisis means for South Africa's economy going forward.
“What path will South Africa take? Markets (and to a lesser extent rating agencies) are still making decisions. One thing is for sure: this is not a 'normal' sentiment shock. , it's not even a temporary, irreversible negative, like the Nenegate shortly after,'' when Mr. Zuma sacked another respected finance minister. Nomura's Peter Attard Montalto writes that Nhlanhla Nene was replaced in December 2015 by a virtually unknown mayor.
“In our view, “People are either too hyperbolic or too optimistic” about South Africa's future, he added. “The reality, as we see it, is alarming, but more nuanced and has a long way to go,” Montalto elaborates.
“We see South Africa currently in a cycle of reinforcing the status quo, but it is already experiencing low growth (negative to zero per capita growth), rising inequality, rising unemployment and high rent exploitation. , the system is on a path of decline and gradually increasing debt, up to the pound. […W]It should be noted that the market has been too optimistic thus far, assuming SA to be on a more 'upward' trajectory, and will be surprised to a large extent. Not only were the short-term positive (such as the upturn in growth between late 2016 and early 2017), but also the structural factors (such as the level of reforms, long-term growth levels, and political outcomes from the electoral conference). . ”
At the same time, analysts are not prepared for a major shake-up in fiscal policy, despite Gordhan's highly-regarded replacement by Malusi Gigaba.
“Policy is unlikely to change, at least in the short term. Parliament has already passed Mr Gordhan's 2017/18 budget, which includes a framework for modest fiscal tightening over the next three years. “Mr Gigaba has clearly committed to respecting the current policy framework,” said John Ashbourne, Africa economist at Capital Economics.
“Admittedly, this may have been a failed attempt to placate the rating agencies. Even so, the budgeting cycle (including the February Budget Speech and October Statement) is well established. “Given that, it will be politically difficult for ministers to change course quickly,” he added.
In theory, Gigaba could use the supplementary budget to abandon Gordhan's plan. Mr Ashbourne said it would further exacerbate divisions within the African National Congress (ANC), where opposition to Mr Zuma's reshuffle is growing.
Still, there are two noteworthy signs of larger changes. These include his ANC policy conference in June and Gigaba's policy on the nuclear power program. Ashbourne elaborates further (emphasis Ashbourne's words):
“This meeting will outline the definition of 'radical economic transformation', a new catchphrase frequently used by President Zuma and Mr Gigaba (but rarely, especially by Mr Gordhan).” […] But it will be important to distinguish between party rhetoric and concrete policy changes. […]
We will also be keeping an eye on Mr Gigaba's policies towards the debated nuclear power project. Certainly, South Africa's energy industry needs investment. However, the controversial proposal to build several new nuclear power plants would come at huge costs (estimated at around 23% of GDP). Critics say renewable electricity is much cheaper and the state-controlled nuclear option would encourage corruption. Leaked documents suggest that Mr Gigaba is in favor of the plan, which his predecessor opposed. If this plan is given the green light, it would be a very worrying sign.. ”
As for Zuma himself, BMI analysts insist that despite the protests, he is unlikely to be ousted in a parliamentary vote.
“Strategically packing the cabinet with loyalists and political allies is likely to further deteriorate public support for Zuma, but we believe it will strengthen his influence within the ANC power structure. “We believe,” BMI wrote.
However, he added that Mr Zuma's tenure will not last forever and it is worth keeping an eye on what happens after he leaves office.
“At this stage it is not yet clear who will succeed Mr. Zuma as president, but we think it is more likely that it will be a 'compromise' candidate or potentially a traditionalist MP rather than a reformist candidate. “There is,” he claimed.
”The president wants to ensure that his successor will protect him from prosecution, so he will likely use his influence to sway the selection process.. ”
The South African rand was up 0.4% at 13.4039 rand to the dollar as of 8:08 a.m. ET. Since the beginning of 2017, it has increased by about 2.5%.
