Nhlanhla Nene axed and replaced by the “Undertaker of Finance” David van Rooyen

Economic sanity had prevailed in SA until Finance Minister Nhlanhla Nene was removed from his post. Now, the country is on a slippery slope as the assault on the rand continues and investor confidence fades.

The South African Reserve Bank (SARB) is on high alert and it would not be surprising if an emergency meeting of its monetary policy committee is convened and interest rates increased. As happened in Russia during December last year, when the central bank raised interest rates by 6.5 percentage points in one hit, the SARB might be forced to lift rates as runaway currency-induced inflation ensues. This outcome has arrived in a situation where investors have already voted with their feet on SA assets as credit-rating downgrades by Fitch and outlook revisions by Standard and Poor’s precipitated the stampede. In the past three months, foreign investors have sold SA equities and bonds to the tune of ZAR 33bn and ZAR 7bn respectively, according to data from the Johannesburg Stock Exchange (JSE).

While these figures are not as large as in previous episodes – during former Fed Chairperson Ben Bernanke’s 2013 taper tantrum and the 2008 global financial crisis – they have set an uneasy tone for SA as it enters 2016. The Institute of International Finance has warned that foreign capital flows into emerging-market (EM) economies could fall substantially from the heady inflows experienced in the past two years when over US$1tr of private capital found its way into EM assets. Judging by recent history, SA has become more correlated with movements of capital in and out of the broader EMs, with heightened sensitivity and interwoven feedback loops seen.

The interaction between capital outflows and the rand has also been re-established.

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