State of SA: The mind of ‘the market’

Government should dispatch Susan Shabangu and Cyril Ramaphosa to London to meet with investors and allay fears coming through the recent weakness in the rand.

This comes out of a note written by Peter Montalto, an emerging market strategist from investment house Nomura. Montalto’s statements are quite pertinent in reflecting what goes through the minds of investment professionals, who collectively can be said to represent the market. More so at a time of worrying jitters around the rand.

Commenting after the rand tanked to more than R10 against the dollar last week, Montalto said it may be an exaggeration to attribute the slide of the rand to a speech made by President Jacob Zuma last week. The speech said Montalto contained no real reassurances or new policy initiatives but was simply a call to continue discussions. He added that the rand’s weakness “was down to USD strength, in our view, but even then ZAR underperformed EM peers. However, the speech certainly did nothing to help and may well have caused markets to think that the government’s response to the situation is to continue the status quo”.

Montalto proceeded to suggest what government could do to “turn things around”.

His list included sending Shabangu, the mineral resources minister, and Ramaphosa, the recently elected ANC deputy president, to London. The feature of Ramaphosa is interesting in providing further evidence that the market is comfortable with the businessman and former trade unionist. It could be that the market is also hoping for Ramaphosa is lined up to take over when Zuma’s term ends.

Moltalto added that government needed to provide a clear sign that it was not biased against the Association of Mineworkers and Construction Union (AMCU) and propping up the National Union of Mineworkers. He suggested that comments attributed to Ramaphosa and Shabangu showing bias towards the NUM were worrying.

Montalto’s other suggestion to government were as follows:

  • Reform of BEE in the mining sector with capital redirected to workers through real share-ownership schemes.
  • Announce that serious restructuring of the mining industry was needed, that both mining companies and unions had to compromise to secure the future of the industry, and that the government would help find jobs elsewhere in infrastructure projects, agriculture and similar low-skilled jobs.
  • Reform of collective bargaining and liberalisation of mining shaft level collectivisation agreements to liberalise labour policy and allow greater democratisation in the mining industry in particular.
  • Promote much greater direct integration of workers into management forums that are parallel to, but independent of, the collective bargaining and union recognition process.
  • Actually implement the reforms promised last year after Marikana, especially on mine worker housing and mine working conditions.
  • Announce a clear, targeted and timetabled NDP implementation plan that includes greater private sector involvement in investment and infrastructure with appropriate incentives.
  • Act as a price giver in platinum especially to restrict supply and boost the price, so allowing time to restructure the industry and fund investment in other jobs growth areas.

Having made these suggestions, Montalto proceeded to conclude that “Unfortunately, the political dynamic is nowhere near being able to deal with this list, especially with the election next year”. He however said suggestion of dispatching Ramaphosa and Shabangu to London and for South Africa to act as a price giver in platinum were doable.

“… We think this gives a benchmark against which we can mark the rhetoric from the government. We are still waiting to hear more details of the DMR’s promised increased intervention in the mining sector which is expected to include price intervention. However, our understanding is that such policy is still only very loosely formed and there is little political capital behind it at this stage. Overall, though, the formation of policy still seems far too bent towards keeping the tri-partite alliance together and doing nothing that might further endanger NUM’s standing”.

As such we remain bearish on the situation. The government is attempting a muddle-through status quo ‘solution’. That can perhaps work until the election if luck is on its side, but beyond that the same structural problems are still there and still need to be dealt with. However, such a muddle-through is why we still see the possibility of a downgrade later in the year”.

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