Late on Wednesday, South African President Jacob Zuma fired his well-respected finance minister, Nhlanhla Nene, out of nowhere, and he replaced him with an unknown former mayor, David van Rooyen.
Right after that, the country’s currency, the rand, plunged to a record low, down about 3%, to 15.0563 against the dollar.
The rand dropped lower still on Friday, reaching 16.018 against the dollar earlier in the day, and yields on the country’s 10-year bonds jumped to 10.5%, up from 8.8% two days ago — just a hair below the 10.8% reached during the financial crisis.
“This suggests that the firing of Mr. Nene has not merely startled the markets, but prompted a more fundamental re-evaluation of views towards South Africa’s long-troubled economy,” wrote Capital Economics’ John Ashbourne.
This abrupt announcement comes at a time when South Africa is plagued by falling commodity prices, high unemployment (in particular, high youth unemployment), and ongoing power shortages.
For starters, this isn’t the first time that something like this has happened in the country. In October, Zuma replaced the minister of mines with an “untested provincial politician.” So this latest firing sheds more light on South Africa’s increasingly problematic governance issue.
As Ashbourne wrote in a note to clients:
After all, the key concern is not Mr. van Rooyen himself but what his appointment says about governance in South Africa. There are rumours that Mr. Nene was pushed aside because of his opposition to an expensive nuclear deal — a pet project of President Zuma’s — and his disagreements with the head of the struggling state-backed airline — the chairwoman of which is, coincidentally, the head of the Jacob Zuma foundation. If true, then Mr. van Rooyen’s appointment could mark a significant reduction in the independence of the national treasury, an institution that has been traditionally respected.
The second issue is that it’s hard to tell what the relatively inexperienced, virtually unknown finance minister might do next — which, obviously, adds more risk to the South Africa’s situation.
Theoretically, the new minister could follow in Nene’s footsteps by sticking to more restrained spending, but that’s not a given. And then there’s South Africa’s battered economy that needs help, too.
“Our 2016 growth forecast of 1.3% is already below consensus,” writes Ashbourne. “And while it’s too soon to adjust this on the basis of this week’s events, it is increasingly clear that risks to this forecast lie largely to the downside.”
In other words, one thing’s for sure:
“This self-induced crisis comes at a very bad time for the country,” Ashbourne noted.
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