President Jacob Zuma and finance minister Pravin Gordhan. Picture: SUPPLIED
President Jacob Zuma and finance minister Pravin Gordhan. Picture: SUPPLIED

Investors have been roiled by South African President Jacob Zuma’s threat to fire his finance minister. The rand fell by almost 3% and yields on the country’s benchmark 10-year bond jumped by as much as 30 basis points on Tuesday after Bloomberg News reported that Zuma had told allies he planned to fire Pravin Gordhan. But, within the course of the morning, investors were starting to pare those losses.

Such optimism looks premature: if Zuma fires Gordhan, investors will take it negatively — the finance minister has become the bellwether for SA’s openness to overseas money. If he gets a stay of execution, investors will still be concerned that internal political conflict could jeopardise their rights in the country.

History provides some guide as to how much worse things could get. Respected finance minister Nhlanhla Nene was replaced in December 2015 by David Van Rooyen, a little-known ANC MP. Then, domestic 10-year yields surged by nearly 200 basis points and Fitch cut the sovereign credit rating one step to BBB-.

With all three credit rating companies having a negative outlook on SA’s government debt, the risk is they cut by at least one notch. This would move both Fitch’s and S&P’s ratings into junk territory, and SA would be at risk of losing its hard-fought investment grade status.

The South African Reserve Bank is unlikely to rush to raise rates to defend the currency — unless there is a real risk to financial stability, or clear economic damage is being caused. The Bank may well want to send a message about the cost of playing with the country’s most respected institutions.

Markets hang in the balance, but by recalling Gordhan in the midst of a high-profile international roadshow with investors, Zuma has sent an unmistakable and profoundly negative signal about SA’s attractiveness as a place to invest.

Ashworth is a Bloomberg Gadfly columnist covering European markets; this column does not necessarily reflect the opinion of Bloomberg and its owners


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