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Gordhan's Removal: Would The Markets React Like They Did When Nene Was Fired?

Analysts predict one of two possible scenarios: either Gordhan's removal will make #NeneGate look like a picnic, or their reaction will be muted.

30/03/2017 09:32 SAST | Updated 30/03/2017 13:32 SAST

While it remains to be seen whether Finance Minister Pravin Gordhan will be fired this week, analysts are predicting the economic impact of such a move could go one of two ways: either the reaction of the markets will be massive, making the removal of 2015 Nhlanhla Nene seem like a picnic in comparison, or the reaction will be muted as the markets have already prepared for political uncertainty.

One thing analysts seem to agree on, however, is that comparing the two events — the removal of Nene and the possible removal of Gordhan — are difficult.

Iraj Abedian, an economist at Pan-African Investment and Research Services, said that while the removal of Nene was a "weekend event", the removal of Gordhan would be a long-term one.

But Dawie Roodt, an economist at Efficient Group, said that while Nene's removal had taken the markets by surprise, the markets have since become jaded and have built-in buffers to prevent heavy losses, should another major political event rock the country.

President Jacob Zuma fired Nene on December 9, 2015, replacing him with an unknown African National Congress (ANC) parliamentary backbencher, Des van Rooyen. The markets went into a tailspin and, after significant pressure from both inside and outside the ANC, Zuma replaced Van Rooyen with Gordhan.

Writing for Fin24.com just after Nene's removal, economist Azar Jammine said that event had raised South Africa's debt servicing costs by about R1.5 billion a year.

Back then, the rand had its longest streak of losses since November 2013, he noted.

The rand hit a new low of R15.38 to the dollar following a speech by Van Rooyen, in which he accepted the job of finance minister. Jammine noted that this sparked a new round of selling off of the rand.

Bloomberg noted that the rand hit a 14-year low in the wake of the announcement, and banking stocks plummeted.

At the time, Peter Kinsella, head of emerging-market and economic and foreign exchange research at Commerzbank AG in London, was quoted by Bloomberg as saying: "Zuma gave the rating agencies the perfect justification for further downgrades and the loss of investment grade status."

Other economic impact indicators were seen only much later. The Public Investment Corporation, which invests the pensions of thousands of government employees, lost more than R100 billion when Nene was fired.

This was only revealed much later, when the PIC appeared before the standing committee on finance in May last year.

The PIC revealed that the Government Employees Pension Fund had lost R95 billion, the Unemployment Insurance Fund lost R7 billion and the compensation fund R3 billion.

Also in May, reports emerged that South African bonds and associated equities had suffered total capital losses of R506 billion.

Speaking to Huffington Post SA this week, Abedian said the removal of Gordhan would result in a two-phase economic fallout.

First, there would be a "violent market impact", with "substantial" movement in the currency. Secondly, and this would play out over a longer period, the country's credit record would take another knock, potentially leading to a ratings downgrade to junk status.

"The economic impact is not an event, it's a process," he said, adding that foreign investment in the country would slow slowing down. The full impact would take many months to fully reflect in the everyday lives of South Africans, he said.

But ultimately, the impact would be permanent.

"Nene was a blip on the radar compared to what will happen if Gordhan goes, and yet it wiped off billions from the economy that's taken us six months to recover from."

But Roodt believes there is another, more likely outcome, if Gordhan is fired.

"No, I don't think we will see the same impact," he said. "The reason is that markets have discounted some development on the political front to a large extent."

This means that the markets have become jaded to South Africa's political landscape and have put in place buffers to guard against another political shock.

"Subsequent to Nene's firing, the markets have seen that we have a rogue president. We see that the markets didn't react as violently this weekend (when rumours of Gordhan's removal resurfaced). I don't think the markets will react that violently if he's fired because it's built in to the market already."

As evidence of this, Roodt noted that bond yields are currently "extremely expensive".

"We are paying a massive risk premium as it is. That's already a sign that buffers are built into the markets now."

He said the markets now accept that Zuma will be around for another two years, "and we'll just have to ride it out."

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