The first quarter of 2017 was characterised by a gradual improvement in South Africa’s economic outlook, undone by the cabinet reshuffle on 30 March and the subsequent downgrade by S&P Global Ratings. Prior to this, South Africa’s short-term economic indicators were improving.

The current account deficit narrowed from 6.2% of GDP in 2014 to an acceptable 1.7% of GDP, inflation appeared to have peaked at 6.8% in December, and the rand strengthened by about 20% against developed market currencies. The prices of local fixed income assets reflected the sentiment that times were getting better. The yield on the 10-year South African government bond rallied 140 basis points from its December 2015 high and the JSE All Bond Index (ALBI) returned more than 50% in dollar terms from its low in January 2016.

In the one week following the cabinet reshuffle, the 10-year South African government bond reversed all its quarterly gains and the ALBI lost 10% in dollars.

The government’s decision to remove Pravin Gordhan and other ministers has materially increased South Africa’s risks. At time of writing, it is too soon to predict the final outcome of these actions, but a reasonable conclusion is that the range of fu ture scenarios has decreased. Two different and binary scenarios now seem more likely than the middle ground.

It is worth noting that, irrespective of short-term developments, long-term fixed income performance is related to South Africa’s economic prospects, in turn dependent on structural challenges such as capital investment, policy certainty and education.