Once the queen of the prom

…Now no one even wants to talk to her. The rand is like Lindsay Lohan or Charlie Sheen: once loved, now reviled or ignored. Moreover, we cannot even blame the EM basket or the USD, because the rand stands alone as far as poor performers go.

The country’s structural problems are becoming very evident once again. Yesterday I sent out some technical analysis highlighting some concerns about the long-term technical outlook, but I did not think this move would be so rapid and violent.

It’s almost as if investors have finally given up on the yield argument and the realisation has set in that ZA Inc. has some serious problems. Not least of these is Eskom and its balance sheet. To put it very plainly, Eskom can bring the entire country to its knees. It is overstaffed, overpriced, and technically bankrupt. Therefore, its solution options are limited to one of three (or a combination):

• Reduce its staff complement, quickly. This will leave the unions jumping up and down, which is not a great idea with national elections around the corner.
• Raise tariffs (again), thus placing consumers under further pressure, leading to more protests and voter discontent. 
• Ask the government for more funding, thus raising net government debt levels, possibly leading to further downgrades. Of course, none of this is new news, but the market chose to ignore the danger signals in the wake of Ramaphosa’s December victory.

Questionable new dawn

Since then SA bonds have blown out by close to 100Bp, and the rand has now retraced to levels last seen before the ANC’s December conference. I have warned for a while that even as Ramaphosa’s victory has ushered in a new dawn, nothing much has changed.

We may have a new cabinet – but it is still bloated and expensive. We may have a few new boards at SOE level, but their balance sheets are still an unmitigated disaster. No one has been prosecuted. No money has been repaid. Even McKinsey, who are standing with a billion rand cheque in their hands, can’t find anyone to give it to.

Noble local undertaking, global uncertainty

The president wants a trillion rand of foreign investment – a noble undertaking. However, it will be tough to get signatures to paper when said investor does not have security of tenure (until the land question is dealt with) or security of energy generation. On top of all this, we have Trump and his cronies waging economic war with their allies, creating all sorts of global uncertainty. 

What happens in an environment like this is that yield hunters run for the hills. Everyone heads for the exits at the same time, and no one wants to be associated with Lindsay (or Charlie).

Of course, at some point, it will all settle down again and higher yields may offer some attraction – but for now, no one wants to dance with us.