On Friday morning President Zuma of South Africa dismissed his Finance Minister and Deputy Finance Minister. Such a move had seemed likely after the highly unusual decision to call back the two ministers from a roadshow in London earlier that week.
Finance Minister Gordhan enjoyed a strong measure of market confidence, in a country where institutional strength has been seen to be in short supply. As such, his sacking represents a real blow to South Africa’s credibility.
Over the course of last week the rand sold off approximately 8% against the dollar. The spread on South African dollar denominated sovereign bonds, as measured by JP Morgan’s EMBIG Diversified index, moved from +239bps to +269bps over the same period.
We would not step in here, however. The currency’s sell-off still leaves it inside the one-year average of 14 rand to the dollar, and well inside the one-year high of 15.9. As for bonds, we expect South Africa to now lose its investment grade ratings from at least two of three ratings agencies. South African paper should therefore trade closer to BB rated Turkey (+314bps).
Overall, the decision to sack Mr Gordhan reveals the high stakes around the battle for power in South Africa this year. As the African National Congress gears up to choose its next leader later this year, the issues surrounding President Zuma’s controversial time in power seem to be coming to a head, as he battles to secure his position and legacy.
With little clarity around how this probably destructive endgame might play out, and value set to leak further in South African assets, we prefer to be on the sidelines here.