South Africa: Gordhan knot

Emerging markets often reward regime changes. Brazilian stocks posted gains following president Dilma Rousseff’s impeachment. The South Korean won strengthened ahead of Park Geun-hye’s removal. The downfall of South Africa’s Jacob Zuma had been eyed as the next possible catalyst for a rally. That now looks unlikely, even if bond markets have been slow to catch up.

Just as markets can remain irrational longer than investors can stay solvent, so troubled governments in developing economies can cling on long past their sell-by dates. Mr Zuma, who has been embroiled in numerous scandals and corruption allegations, has just reset the timer on his presidency with a cabinet reshuffle.

Immediate market reaction to South Africa appointing its fourth finance minister in two years was predictable: the rand, bonds and stocks sold off. The cost of insuring South African government debt against default rose. Over a longer timeframe the moves look less apocalyptic. Year to date, the rand is still up against the US dollar, Johannesburg’s main equity index is 3 per cent higher and bond prices remain above year to date lows.

Investors seem unwilling to let go of their hopes for a turnround. At the start of the year, South Africa’s local and foreign-currency debt seemed ripe for price rises. Inflation was falling, the country had avoided a downgrade to junk status and the recessionary slump appeared to have eased. Interest rates were set for a cut. The forced departure of finance minister Pravin Gordhan, who was instrumental in helping the country keep its investment grade status, should nullify that rationale.

Now, growth is sluggish, debt is rising and a downgrade looks more likely. That will force passive (and eventually active) funds to sell its debt. The average yield on South Africa’s external bonds is 4.82 per cent. The equivalent in Turkey, rated about two notches below South Africa, is 5.5 per cent. South African bond prices are due another fall.

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