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Sovereign risk in South Africa

May 27, 2009

Recent events in South Africa have sent some conflicting signals to investors about sovereign risks. On the one hand there was some regulatory flip-flopping over the Vodacom listing given objections from the union organisation COSATU, which raised questions about the influence of unions in Jacob Zuma’s administration. On the other hand the sovereign issuing some $1.5 billion was highly successful and oversubscribed.

With Zuma recently elected on a platform of change for his domestic audience and continuation of old policies when speaking to investors, there is a raft of new ministers and new ministries and quite a bit of policy uncertainty. No foreign investor will deny South Africa’s need to address serious social problems of inequality, housing, jobs and education through a more developmental state agenda.

However investors I speak to simply want to see that this is not at the expense of the productive sectors of the economy. This agenda will naturally involve the ANC’s allies: COSATU and SACP (communist party).  As such, the process of governing will be a noisy affair for investors. I put the Vodacom incident down to such noise.

However I believe the new Zuma administration will find itself heavily constrained by the need to raise funds for its agenda and so keep investors onside as the government’s borrowing requirement balloons. Add state owned enterprises engaging in very necessary investment, and a current account deficit and you arrive at a funding requirement north of  500 billion rand for the next two years.

This will act as a strong rationalising influence though a backup overdraft in the form of an IMF flexible credit lending facility would be a benefit.  It also should not be forgotten that there is still a strong business influence in the cabinet and the ANC from the likes of Cyril Ramaphosa and Tokyo Sexwale.  Most investors buy the case of policy not shifting sharply to the left, though a lot of questions have been planted in the minds of investors.

Keeping the different factions in his cabinet in line will be key for Zuma’s success, especially with two new hurdles looming: the Bharti/MTN and the Xstrata/Anglo American mergers. Both are sensitive and likely to be jumped on by unions.  The inflation-targeting debate is also being reopened locally — a topic foreign investors love to discuss.

It is now up to Zuma and his team to deliver on prudent macro-policy as well as his developmental state priorities in order to sustain the current goodwill from investors.  It is still early days for his administration. We hope not to be disappointed — for South Africa’s sake as much as anyone elses.

Peter Attard Montalto is emerging market economist at Nomura International.

Comments

Dear Peter,

A very interesting piece and I commend you for it.

I think 10.62 on the Dollar Rand [It was interestingly a double top formation] represented the moment of maximum Zuma risk aversion and that moment was overlayed by the global flight back into the Dollar [now reversed and how].

The interesting complexity of President Zuma’s persona is also a narrative all of its own. However, I think his ability to reach deep into the hinterland of his different Audience’s is his strength and his political capital. And also it is much more sensible politically to set expectations low and then outperform them.

Nevertheless the GDP number was a sticker shock number and he has to deliver at a time when Global Economies are slowing rapidly.

What plays to South Africa’s advantage is this. The Chindia Africa trade axis tops $100b now and South Africa remains the gateway to the Southern part of SSA. I think we will find that Chindia will step into the breach, in the near term.

The $1.5b Eurobond also is the most accurate scientific barometer of Investor appetite for SA risk.

And I think Gold is set to slice through $1000.00 like a hot knife through Butter which will also support.

Thanking you
Aly-Khan Satchu
http://www.rich.co.ke
Twitter alykhansatchu

 

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