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Gordhangate vs Nenegate - a difference in impact

Sep 06 2016 06:16
Carin Smith

Cape Town - Unlike December’s Nenegate episode, which occurred in the midst of a global sell-off of emerging market assets, the current "standoff" between Minister of Finance Pravin Gordhan and the Hawks is fortunately taking place against a more favourable global backdrop for emerging markets, Old Mutual multi-managers Dave Mohr and Izak Odendaal said in an investment note issued on Monday.

Yet, they cautioned that renewed political uncertainty threatens to further dent confidence in the South African economy just as data seemed to be pointing to a slight upturn.  

StatsSA is expected to announce a fairly strong second quarter economic growth number on Tuesday, following the first quarter’s decline. However, data for the third quarter so far is mixed.

READ: Nenegate shook SA investor confidence - IMF

The political uncertainty that flared up over the past two weeks caused anxiety for both investors and ordinary citizens, explained Mohr and Odendaal. However, to them the most important political development over the past month, in terms of its longer-term implication for SA, was the local government elections and not the Hawks’ treatment of Gordhan.

"The latter is obviously unsettling, but it is important to focus on valuations. For example, the local bond market is clearly pricing in the uncertainty. Credit default swaps on government bonds suggest that the market is already treating SA as a sub-investment grade economy," said Mohr and Odendaal.

"Real yields are elevated relative to where inflation is expected to be over time, while short-term interest rates are in peak territory. This suggests remaining overweight to local fixed income."

In their view, the impact of politics coming to the fore in August was both positive and negative.

READ: Gordhangate: How business should react

On the positive side, the 2016 local government election was largely free and peaceful and voters showed that they were prepared to hold politicians accountable, especially in the metro areas. All parties involved also accepted the outcome of the polls.

"While local governments do not usually influence macroeconomic policy, it is notable that those parties with a radical economic agenda failed to make big inroads, showing that the risk of a major shift to populist policies seems limited," said Mohr and Odendaal.

On the negative side, fears that Gordhan would be arrested and removed from his post, and concerns over the direction of governance and economic policy in general, resulted in a sell-off of the rand and interest rate-sensitive assets.

READ: Mark Ingham: Banking shares vulnerable as risk of Nenegate II is rising

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