“We’ve observed recent reports that strongly hint of conflict between branches of South Africa’s government, the possible machinations of patronage networks and a seeming challenge to the National Treasury’s independence… It is difficult to make reasoned and defensible decisions to continue providing state-owned companies with additional funding using clients’ money.”
from Zero Hedge:
In a shocking move, South Africa’s largest fixed income manager has halted all lending to state-owened entities on governance concerns.
- *FUTUREGROWTH SAYS IT CAN’T PLACE CLIENT MONEY AT RISK
As Bloomberg details,
Africa’s biggest private fixed-income money manager will stop lending money to six of South Africa’s largest state companies because it’s concerned about how they are being run, government infighting and threats to the independence of the finance ministry.
Futuregrowth Asset Management, which has about 170 billion rand ($11.7 billion) in assets, shelved plans to lend more than 1.8 billion rand to three state companies on Tuesday, Chief Investment Officer Andrew Canter said by phone from Cape Town on Wednesday, without giving more detail. The fund manager will only resume offering loans and rolling over existing debt once it has determined that what it sees as proper oversight and governance at the companies have been restored.
The companies are power utility Eskom Holdings SOC Ltd., rail and ports operator Transnet SOC Ltd., South African National Roads Agency SOC Ltd., the Land Bank of South Africa, the Industrial Development Corp. of South Africa and the Development Bank of Southern Africa. The decision won’t immediately affect lending to the government and other state bodies such as water boards and municipalities.
“We’ve observed recent reports that strongly hint of conflict between branches of South Africa’s government, the possible machinations of patronage networks and a seeming challenge to the National Treasury’s independence,” Canter said.
“Any material risk to the state-owned entities’ governance, budgeting and approval processes for spending or lending must impact on our forward-looking credit assessments. It is difficult to make reasoned and defensible decisions to continue providing state-owned companies with additional funding using clients’ money.”
Bonds of the major SOEs are tumbling as are South African bank stocks.
- ZAR falls 0.9% to 14.6327 per dollar by 2:45pm in Johannesburg, heading for weakest closing level since July 7.
- Yield on benchmark rand-denominated government bonds rise 2bps to 9.01 percent
- Yield on Eskom’s $1.25b of Eurobonds due Feb. 2025 rise 28bps to 7.15%, set for highest since July 7
South Africa is vulnerable to financial market turmoil following the Brexit vote, due to the high degree of foreign ownership of government bonds. While the rand appears to have benefited from expectations for lower global rates as a result of the vote, a renewed sell-off could keep inflation higher and weigh on consumer spending. This could add to the challenges for the South African economy in 2016. A recession is possible after real GDP contracted in 1Q on a drop in exports and mining production.
A lot of this uncertainty stems from the ongoing Gordhan debacle… Leading officials of the African National Congress (ANC) party, have called on finance minister Pravin Gordhan to hand himself in for questioning over allegations of corruption.
An investigation into the matter has drawn battle lines between Gordhan on the one hand, and President Jacob Zuma and his allies on the other.The case surrounding finance minister Pravin Gordhan dates back to the time he headed the country’s tax service between 1999 and 2009.It’s believed he set up an illict unit to spy on politicians, including President Jacob Zuma.Last Thursday, he was summoned by police investigators known as the Hawks for questioning, but refused to go, saying he’s the victim of a witch-hunt.Widely respected in the finance sector for his attempts to clean up corruption, Gordhan is credited with targeting state-enterprises owned by the powerful Gupta family, who president Zuma is close to.“You have on the one hand a man who wants to buy loyalty with state resources,” Nick Branson, a senior researcher at the Africa Research Institute in London told RFI by phone, “and on the other, someone who’s determined to do his job to ensure that the public finances are in a proper state.”Those of the country’s power provider Eskom have come under scrutiny.Gordhan put out a statement last week saying that Eskom had not been complying with the Treasury, notably on coal contracts linked to the Gupta-owned Tegeta Resources.But other state-owned companies have also been criticized for failing to cooperate with the Treasury, such as Denel, an aerospace and security company, Transnet, a rail and port authority, and VR Laser Asia, another Gupta company.“It essentially shows that there are people within these state-owned enterprises who are trying to profit from their political connections,” says Branson.
Gordhan believes he is paying the price for the zealous work of the National Treasury into the influential Gupta family, who have since announced they will be selling all their interests in South Africa by the end of the year.