A well-considered cabinet

President Cyril Ramaphosa’s cabinet reshuffle has drawn a very muted response from markets. Both the rand and South African bond yields showed no real reaction to Monday evening’s announcement that saw a number of ministers removed from their posts and Nhlanhla Nene and Pravin Gordhan brought back into cabinet as the ministers of finance and public enterprises respectively.

Read: President Cyril Ramaphosa’s major cabinet shake-up

This is in contrast to the gains caused by Ramaphosa’s victory at the ANC elective conference last year, and the recall of Jacob Zuma earlier this month.

“I think there’s already been a lot of optimism priced in after Ramaphosa’s victory in December and his becoming president,” said Nadir Thokan, investment strategist at 27Four Investment Managers. “We have seen bank shares jump, the rand has retraced aggressively, and bond yields have backed up. So I think markets are saying we’re not going to re-rate things further for a credible finance minister because we’ve already priced this story in.”

At the start of December, the rand was trading at around R13.75 to the dollar, and 10-year government bonds were yielding 9.37%. On Tuesday, the rand was near R11.60 to the dollar, and bond yields were just above 8.0%.

While in both cases this was slightly below where they began the week, it was without showing any real direction. Bianca Botes from corporate treasury management at Peregrine Treasury Solutions acknowledged that this is because the market had already priced in changes to to the cabinet, but added that the the announcement also showed how Ramaphosa is having to balance keeping the ANC united while working for genuine reform.

“The composition of cabinet resembles the pressure Ramaphosa is under to maintain a ‘united’ party,” Botes noted. “Controversial placements such as David Mabuza as Deputy President speak to the balancing act Ramaphosa is performing and indicate that, although transformed leadership has taken place, the party as a whole has not been transformed.”

Roger Williams from Centaur Asset Management said that the new cabinet is a reflection that Ramaphosa is trying to unite the ANC and has therefore been pragmatic in his appointments. It was extremely positive that Ramaphosa made strong appointments to the key ministries of finance and public enterprises.

“Nene was excellent in the past as finance minister, and a great choice for the post,” Williams said. “Gordhan is extremely competent and without a doubt the best minister to sort out public enterprises.”

Thokan agreed that Nene brings significant credibility to the finance portfolio.

“You just have to look at how the market reacted when he was fired, even though it was a surprise event,” Thokan noted. “He was the one who implemented the ceiling cap, he’s the one who started tackling government expenditure and warning that a debt-to-GDP ratio in excess of 50% was not going to be sustainable. He was speaking the right language to the ratings agencies, and I think a large part of why Fitch and S&P held off on downgrades for as long as they did was because of the fiscal consolidation path that he was communicating.”

Williams also saw the appointment of ANC chairperson Gwede Mantashe to the mineral resources portfolio as a potentially positive move.

“He can speak to different constituencies, both unions and management, and will consider all sides.” said Williams. “However whether he can pull it all together and get things done, we will have to see.”

Gordhan’s appointment also sends the right message that the issues at state-owned enterprises (SOEs) are going to be addressed.

“SOEs remain a big risk and that’s why Gordhan has been selected to that portfolio,” said Thokan. “How he manages those organisations with support from Nene is going to be critical.”

In addition, the appointment of Jeff Radebe to the energy portfolio suggests that a nuclear energy deal is now truly off the table.

“Nuclear is absolutely unaffordable and I think that is clear with the energy minister being replaced,” says Thokan. “Everyone is on the same page now.”

Williams also believed it was important that the ministers who have been implicated in state capture were removed.

“President Ramaphosa has had a frantic fortnight, and within the constraints facing him, the cabinet appointments have been well considered and generally positive,” he said. “I think in the short space of time it would have been too much to expect for him to also reduce the number of ministries, but in time this could still be on the agenda.”

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