Subsequent to writing the article below, the President has announced a dramatic u-turn by appointing Mr Pravin Gordhan as the Minister of Finance. Mr. Gordhan is highly regarded having previously served as the Minister of Finance after Trevor Manuel.
Mr Gordhan has come out saying all the right things about maintaining fiscal discipline etc., which has stabilized markets. However, I still believe the events of last week has further damage the credibility of our current leadership, which is only likely to be reversed once we see a change in leadership and commitment from the new President in tackling the serious issues we currently face as SA Inc.
I had to laugh listening to the radio with some government spokesperson saying that the Rand’s fall could not have been caused by Nene’s firing as he was not that important. When I say laugh, I don’t mean to make light of this, it is just better than crying. This fellow is either stupid or more likely a spin doctor for our one-man wrecking ball President Jacob Zuma. The fact is the market realised Zuma has appointed a marshmallow yes man in charge of our treasury. The fox now has the key to the henhouse. The cookie jar has been broken open.
This is clearly the first step in a change to our monetary and fiscal policies, which have been our saviour through the Asian crisis of 1998, the Tech bubble of 2000 and more recently the Great Financial Crisis of 2008.
Zuma could not have got his timing more wrong, with US i-rates set to rise and China’s slowing growth negatively affecting emerging markets dependent on commodities i.e. South Africa. This makes me think he doesn’t particularly care or he is simply too stupid to understand the implications thereof; in a world competing for capital flows you cannot simply follow populist policies, which have been tried, tested and failed horribly elsewhere with dire consequences.
If the market is right and our new finance minister intends running a larger budget deficit then it is a given our sovereign risk rating will be lowered to junk status. This will result in higher borrowing costs, a weaker rand and higher inflation, necessitating higher interest rates, which will result in even lower economic growth as the heavily indebted consumer comes under pressure from higher borrowing costs. This will result in more job losses exacerbating the weak economic growth in a negative feedback loop. And it’s the poor who end up suffering.
Of course we may not see higher interest rates if No 1 decides to fire our highly regarded Governor of The Reserve Bank, Mr. Lesetja Kganyago, this will result in an even uglier end game as hyperinflation and spiralling government debt leads to a sovereign debt crisis and ultimately a government debt default.
So Mr. Government spokesperson, you may be right, Mr. Nene is not that important, it is what he stood for as the gatekeeper of prudent fiscal management, which was sacrosanct and has not gone unnoticed by global capital, which we so highly depend on for our very survival.
Mcomm, CFP®, HdipTax
T. 021-851 3746