Minutes after the resignation of Finance Minister Trevor Manuel was announced, R220billon of value was wiped off the JSE.
The figure could have been higher had Manuel’s office not taken steps to assure the market that he had made himself available to serve under the new president. The rand, which is effectively the country’s share price, fell 2,5% against the dollar. This wiped R50-billion from our GDP when measured in dollars.
President Thabo Mbeki’s resignation, in contrast, did not even make investors blink: on Monday the markets closed nearly 2% higher, driven by reactions to the proposed United States government bail-out of the banking sector rather than mundane issues like a South African presidential crisis.
If ever Manuel wanted to show his value to the incoming presidency, the market reaction to the badly handled announcement of his resignation sent a clear message. Presidents may come and go, but finance ministers run the country.
In a press briefing from Washington DC on Tuesday afternoon Manuel was quick to assure journalists that he expected to remain South Africa’s finance minister: “All formalities will be concluded so [that] when next we speak I will speak as minister of finance.”
Manuel argued that his letter of resignation was purely procedural and that he serves at the pleasure of the president, who has the right to name a new Cabinet. He indicated that he had talked to other ministers before he left for New York on Saturday and had expected a mass resignation of ministers to allow acting president Kgalema Motlanthe to select his own Cabinet. “I have not been privy to the list but I did speak to other Cabinet ministers,” he said.
Whether this drastic action was necessary, by forcing the new presidency to ask him to remain Manuel has ensured that there will be few debates over his policies in future. During the press conference Manuel, who was attending an International Monetary Fund conference in Washington, confirmed that he had spoken to finance ministers from other countries to assure them that he would continue to serve and that “these assurances have been well received”. No doubt what was well received was the implication that the new presidency will maintain the financial policy framework set out under Mbeki’s reign.
The heads of the various treasury agencies, including treasury Director General Lesetja Kganyago, South African Revenue Service Commissioner Pravin Gordhan, Statistician General Pali Lehohla and Financial Intelligence Centre head Murray Michell, all confirmed that they would continue to serve government in their professional capacities.
The request for Manuel to remain may have thrown a spanner in the works for groups within the ANC that would like to see the triumvirate of Thabo, Trevor and Tito (Mboweni) removed from office. In any case they will have to wait until August next year to see if the Reserve Bank Governor Mboweni will leave his post. Unlike Cabinet ministers, who can be dismissed or removed at the president’s will, the Reserve Bank governor is appointed by the president in consultation with treasury and enjoys a fixed-term contract.
Although the latest figures show that inflation has escaped the control of the Reserve Bank, South Africa can take consolation from the fact that its Reserve Bank is one of the few central banks in the world that has not had to inject liquidity into the market during the present global financial crisis. Our banking system remains robust in the face of a catastrophic financial meltdown.
Nevertheless Mboweni will be facing further tough calls on interest rates next month after the release of August’s inflation numbers. CPIX (consumer inflation less mortgages) rose by 13,6% year on year, substantially higher than July’s figure of 13% and above analysts’ expectations of 13,3%. It was the 17th consecutive month that CPIX inflation has been above the target range of 3% to 6% and the highest level recorded since the inception of the index.
Food and electricity prices are still the main drivers of inflation; transport costs declined on the back of the August cut in the petrol price.
Kevin Lings, an economist at asset managers Stanlib, said that lower-income earners have suffered most from rising food prices. For people with low incomes, inflation is now at 17% as food alone accounts for 51% of their spending.
Lings said there is continued upward pressure on processed food inflation although agricultural inflation and international food prices have slowed. This is because food producers are trying to restore the profit margins that shrank in 2006 and 2007. “This would suggest that there will be a little more upward pressure on food prices in the short term, but the rate of increase in food prices should start to moderate convincingly during 2009,” he said.
Lings said CPIX inflation should now have peaked and should ease off towards the end of the year, especially given the reduction in the petrol price and the high base that has been established in food inflation. Lings says the reweighting of the CPI (consumer price index) basket in January, combined with the high-base effect, should create a more favourable outlook for inflation.
He said it is possible that the CPIX inflation will move back inside the target range by the end of next year, allowing for cuts in the interest rate next year. However, he warned that relying on forecasts is risky because of the volatility of the rand and huge swings in the oil price. “There is also uncertainty on rental increases, which will play a more important role in the new basket. The precise impact of reweighting of the CPIX basket on inflation in early 2009 is also not clear, which adds to the current forecast uncertainty.”