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Daniel Silke: Ramaphosa, the rand and the Reserve Bank's rough ride

Jun 10 2019 13:32
Daniel Silke

It wasn’t meant to be like this. Sure, there was the muddling delay before announcing his first Cabinet some ten days ago, but a new president with his new team should’ve been off to a much better start than this.

A multitude of issues rained on Ramaphosa’s parade, chief of which were largely as a result of his own party’s communication ineptitude combined with the ongoing – and increasingly debilitating – factionalism now on almost daily public display.

With the election over, the ANC seemingly cannot contain its own internal conflicts as the remnants of the Jacob Zuma era – in personality and politics – remain stubbornly entrenched at the most senior levels of the party.

By close of business on Friday, the damage had largely been done. A renewed bout of policy uncertainty had rocked the currency markets, driving the rand to a nine-month-low.

This should’ve been the week in which the new Cabinet visited their respective departments and presented an uplifting motivational or confidence-building address in which they outlined the ‘new dawn’ philosophy of their new president. 

Each Cabinet minister could’ve used their status to inject some initial confidence-building ideas into a critical team of technocrats that will need to deliver on efficiencies and implementation. The knock-on effect here would’ve been to send a message to both domestic and foreign interests that change was in the air.

Alas, this was not to be.

Bad start

Instead, the utter confusion unleashed by Ace Magashule following the ANC Lekgotla was the take-home for the week. Whilst the country digested the populist suggestions of possible quantitative easing and the politicisation of Reserve Bank policy or its mandate, the currency was tanking.

But the currency fall was also a reaction to a much broader set of negative indicators that laid the foundation for the distress.

Dismal GDP figures started the ball rolling. And, the magnitude of the quarter on quarter drop – the worst in a decade – clearly began the rout on the Rand.

Already, the country had been rocked by the resignation of the CEO of Eskom, Phakamani Hadebe – a pretty unnerving moment for this most troubled SOEs and for the larger economy. A few days later, it was the turn of SAA’s Vuyani Jarana to take the same action.

Whilst Mr Magashule was seemingly charting an alternative economic course all on his own (and one that would surely spook the markets), the two crucial SOE CEOs were themselves expressing frustration and disappointment with the almost impossible jobs they were given.

Damning signals

When your key CEOs in Eskom and SAA resign just after a new Cabinet has been announced, the market signals are pretty damning. The new Cabinet should’ve been a time to reiterate the continuity of management at these SOEs and boost confidence in their turnaround strategies. Instead, the respective resignations sent a message of complete confusion into the marketplace.

South Africa therefore witnessed the worst of all worlds. Mr Magashule presented the solution in terms pretty unacceptable to a raft of investors and South Africa-watchers.

And it was a solution that was even more untenable, given the ravages of state capture and their weakening of the South African institutional fabric for narrow political ends. It was – proverbially – like waving a red cloth to investor bulls. 

On the flipside, the CEO departures at Eskom and SAA left an even deeper suspicion that these entities cannot be rescued – even under the more sober and promising leadership of President Ramaphosa.

Global factors

But wait, there’s more. Investors were also spooked by the ongoing battles between the Public Protector and seemingly, even President Ramaphosa. And the on-going tariff wars which threatened (but eventually did not) engulf Mexico added a global factor to broader suspicions about Emerging Markets.

The China/US trade conflict clearly has upset global markets and has made investors that bit more skittish as equities on the JSE have softened and the US dollar has held strong. But it was the domestic political factors in South Africa that really precipitated the fall in the currency as global emerging-market currencies held relatively constant over the week.

The cost to consumers

South Africans already know the effect of a weak currency. Fuel price increases (on top of rising indirect taxes) will strain the consumer even further. The knock-on effect will dampen consumer confidence and further add to a decline in disposable income.

At a time when the fuel price had dropped on global markets, the benefits thereof will be whittled away by the series of own-goals this past week. Not to mention the expectation of a small interest-rate reduction – that can be shattered by a currency in distress.

And, ironically, any borrowing done in USD terms will cost the country more, adding to our already high debt-to-GDP burden. Bringing in skills to fix Eskom, keeping SAA afloat and importing large capital and infrastructural equipment will also all cost more.

Whilst economically, political factionalism and policy confusion will cost us, it is also costing President Ramaphosa after his first full week as the Chairman of ‘Board South Africa’. Whatever momentum he could’ve (and should’ve) gained from his election victory has been lost.

And, as a new president, he should’ve immediately used his authority to stamp this on his party. Instead, his warring factions have stolen the political thunder with potentially disastrous consequences.

Lingering skepticism

Even the president’s somewhat late but nevertheless clarifying message reiterating the standing policy on the independence of the Reserve Bank saw little initial reaction on global markets. When the president speaks, even the markets seemed too skeptical to really listen. Restoring his own authority is therefore becoming urgent.

For President Ramaphosa, his first action this week should be to crack the communications whip in his own party so that only select individuals can pronounce on economic policy issues in an unambiguous fashion.

His second action should be to get his Ministers to relay the ‘New Dawn’ approach to the technocrats in their respective departments with enthusiasm and urgency.

And his third action should be to work on a State of the Nation address to be delivered in ten days' time that undoes all the damage done this week and seriously presents a plan for change – with the political will and risk that is needed to take it further.

Should all these three short-term elements fail, the ZAR will remain vulnerable. In effect, the currency has been a proxy for confidence levels in the ability of President Ramaphosa to effect change. Not having done so yet, the currency remains on the back foot. The next few weeks will be crucial as the president attempts to fight off his own political challenges and restore confidence. In all of this turmoil, the Rand will be a guide.

sarb  |  anc  |  cyril ramaphosa  |  daniel silke  |  economy  |  south africa
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