A Black Thursday!

With consumer confidence hovering near 14 year lows and business confidence at a 5 year low, Wednesday evening’s surprise decision by President Jacob Zuma to replace Finance Minister Nhlanhla Nene by the relatively unknown Des van Rooyen finally pushed foreign investor confidence off a cliff as well. The reaction to the announcement has been disastrous and overall confidence was left shattered. The rand sold off to its weakest level ever, South African government bond yields rose the most on record (increasing the country’s borrowing costs) and banking stock suffered a bigger daily decline than during the worst of the 2008 market sell-off. One is left with little choice but to question the intention behind President Zuma’s decision to replace the credible Minister Nene without a proper explanation. It is a blow to institutional credibility as Treasury is the most important cabinet position. Nhlanhla Nene had a reputation for reigning in excessive government spending. The impression was left that it was an irresponsible move that put the South African economy’s prospects in jeopardy. The market suggested that it was a watershed moment. There are too many uncertainties and financial markets don’t do well under such circumstances. It was also a poorly timed decision, wedged between the credit rating agencies’ decision to lower South Africa’s credit rating and next weeks Fed decision on US interest rates. The country is teetering on “junk” credit status and we will now have to wait for the 25 February Budget Review Speech to see whether Nene’s legacy of fiscal prudence and conservatism will be followed.

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