The firing of Pravin Gordhan and deputy Mcebisi Jonas seemed to be a done deal when he was ordered back from London on Monday. However, there was stiff resistance within the ANC to dismiss him, so Zuma could not take immediate action. This was reflected in the Rand not weakening as dramatically as when former Finance Minister (Nene) was fired in December 2015.
Over the last few days, Zuma has had to wrestle with senior ANC members to gain their support, which has not been overwhelming. Some media have reported that the “top six” were split on Gordhan’s dismissal. Despite this, Zuma’s desperation to get rid of Gordhan prevailed and he made his executive decision, citing intelligence reports claiming that Gordhan and Jonas were on an overseas roadshow to discredit him.
At the outset, this is a shocker for the country as a Zuma-allied Finance Minister would loosen government spending and lead the country into further economic distress. A most likely rating agency downgrade would also take place.
Where to from here:
Amazingly the financial markets are not panicking (at 4pm on Friday the Rand/Dollar is 13.30). When Nene was fired the Rand/Dollar eventually went out to 17. This clearly means that all is not lost and it is possible that the outcome will not be as distressing as it may appear. However, it all comes down to what is the probability of success of a no-confidence vote in Zuma?
A vote of no-confidence is set for next week. This vote will either go ahead next week or during the first week in May. We feel next week is critical to get a positive resolution, if possible. A month’s delay would give the Zuma camp a lot of time to lobby for more support and start raiding the treasure chest.
For a vote of no-confidence to succeed, approximately 50 of the 249 ANC members of parliament would have to vote against Zuma and 100% of the opposition parties. This is possible and would be a major turning point in our politics.
The key issue is what is the probability of 50 ANC members going “rogue”.
Conclusion – it’s 50/50
Given the level of the Rand/Dollar (currently 13.30 at 4pm on Friday, 7 April) the market is leaning to Zuma’s days being numbered.
If the no-confidence vote succeeds, the Rand will strengthen significantly to under 12.50 or even 12. However, if it fails, the Rand will weaken to over 15.
We believe the odds are 50/50 and these odds will deteriorate if the no-confidence vote is moved to early May.
Recommendation
Our view has been that the Rand will strengthen from January 2015 (R/$ 16.8), which it has and we have accordingly recommended a lower direct offshore weighting of 20 to 25% in portfolios. A high direct offshore weighting would be 50 to 60%.
The outcome of the potential no-confidence vote is very difficult to gauge, but a view is necessary. Our view is that probability of a positive outcome is 50% and therefore we recommend existing offshore exposures are maintained until there is more evidence of the political conclusion.