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Cape Town - The lots of little details relating to the so-called "Sars Wars" currently raging between Finance Minister Pravin Gordhan, the Hawks and the SA Revenue Service about an alleged "rogue spy unit", could prevent investors from seeing the bigger and more worrying picture, according to emerging markets economist Peter Attard Montalto of Nomura.
"The real focus here is the political survival of either camp, something that the recent roadshow glossed over with its PR and spin. It presented only part of the story in a much larger narrative," said Montalto.
"We continue to see rand/dollar ending up at R19.0 at year-end, but getting there is going to be a challenge between slow grinds stronger between news and headline risk events and then large sell-offs."
Optionalised bearish strategies, buying upside in dollar/rand, while selling downside, remain in Nomura's view the best route, together with selective rates strategies that minimise negative carry.
"A lot of investors have said to us 'but the Hawks risk losing face' over the actions they are taking. Such entities serving political purposes do not care about public perceptions of them. Fundamentally their loyalties lay with their political ends. That is the whole point in state capture. Gordhan’s ability to garner public and market sympathies is irrelevant," explained Montalto.
More broadly, in his view, investors need to be aware of that the pressure on Gordhan to answer questions is one "sub-battle" within the bigger Sars battle. According to him, this small sub-battle is in turn part of a bigger Treasury battle, which in turn is part of the main battle of success from President Jacob Zuma into the elective conference in December 2017.
"This is why we remain so structurally bearish on SA and its assets in the short to medium run," said Montalto.
He emphasised that the matter of the Hawks wanting answers to certain Sars related questions is but one of the battles Gordhan has to fight. He also has to see how SA can move forward difficult structural reforms to avoid sub-investment grade.
"In this regard, Gordhan’s rallying cry at a press conference that investors were looking for ‘concrete action’ and ‘real steps’ in reform was telling as he seeks to shift the business as usual mantra within wider policy making circles. All this of course is ill timed in a week where Moody’s reviews SA for downgrade," said Montalto.
"The endpoint ultimately is the elective conference in December 2017, which is more in play than it was in the past, though we still think the tenderpreneur camp can win. Pravin Gordhan can use the institutional strengths of the courts and rule of law, but the battles between now and then will be numerous."
