A Gordhan exit will have ripple effect on all in SA

Cape Town - There has been much hype and coverage of the standoff between President Jacob Zuma and Finance Minister Pravin Gordhan in the last few days, which has seen the rand weaken around 5% against major currencies almost overnight.

On Friday afternoon the unit was trading at R14.20/$, from R13.48 on Tuesday before news that elite police unit the Hawks ordered Gordhan and others to report to them in Pretoria on Thursday. This was in relation to an alleged "rogue" unit located within the South African Revenue Service, during the time that Gordhan was Sars commissioner.

The rand reacted strongly, swiftly losing 50c; it is currently down 4.8% for the week.

READ HOW THE STORY UNFOLDED

Brett Birkenstock, director of Overberg Asset Management, gives an overview of the effects a possible Gordhan exit will have on the rand, the economy and the public at large.

The effect of the potential removal of Gordhan on South Africa

Should the current charges and suspected troubled relationship between Zuma and the finance minister result in Gordhan's removal, there will be various well-publicised expected outcomes:

- The rand will weaken amid expectations of an imminent credit downgrade rating to junk status.

- Credit rating agencies will possibly (and now even more likely) downgrade South Africa's credit rating to junk status.

- Equity and bond prices will be hard hit and even property prices will fluctuate in a similar fashion to last year’s Nenegate. Nenegate refers to the fallout following the sudden and unceremonious sacking and replacement on December 9 of then finance minister Nhlanhla Nene with unknown ANC MP Des van Rooyen. Calm returned to the markets when Gordhan was recalled to the post he had held from 2009 to 2014. 

Impact of junk status on the economy and the rand

South Africa is currently on the verge of being downgraded to junk status. A downgrade would mean that bonds (debt issued) will no longer be considered investment grade. That could lead to a sell-off of billions of dollars of South Africa’s bonds held by international funds, resulting in an enormous amount of foreign capital leaving the country. In turn, this would herald a collapse in the rand similar to what was seen in Brazil's real last year.

In addition, it would prove more difficult and highly costly for South Africa to raise money going forward as the country would have to offer a much higher yield on its bonds to obtain foreign investment.

The funds raised from bond issues are used for various infrastructure projects and capital investments, so this will put further pressure on an already faltering economy.

What does the weaker rand, weakening economy and downgrade mean for me?

For starters, a weaker economy will result in further job losses, which means it will be hard for some people to hold onto their current positions. If, however, you manage to stay employed, the chances are that you may not receive a 13th cheque or bonus, and salary increases will be unlikely.

This has a ripple effect that will result in already high consumer debt levels spiralling out of control, tougher conditions to obtain finance, more business failures, more bank repossessions, more crime and possible riot action.

INFOGRAPHIC: Volatile rand rages on Zuma's erratic moves

The more direct impact of a weaker rand on the consumer is:

- Higher food prices: as South Africa is a net importer of food, the price of food will skyrocket.

- Transportation will increase due to a petrol price increase (the oil price is based in US dollars, and a weaker rand means a higher price).

- Travelling abroad may now be impossible as the rand cost could be exorbitant.

- Property prices will drop (except in areas where there is foreign interest like in coastal regions), as the ability to obtain and service credit will be reduced.

- Inflation will rocket on soaring food, transport and fuel costs among others and this will potentially result in further interest rate hikes - which means less money in your pocket after expenses.

- Stock moves on the JSE and company earnings will differ vastly, with the share prices of local companies and holdings (banks and retailers, for instance) dropping hugely, while rand hedge and offshore companies will perform better in rand terms. This may affect retirement planning as well as consumers' ability to maintain the same standard of living.

Suffice it to say that the current situation is very serious and it will have a material effect on each and every South African.

However, South Africa has lurched from one crisis to another over the last few hundred years and generally bounced back. Let us hope that sanity prevails and the current crisis is averted.

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