LONDON // It has been a tempestuous fortnight or so for South Africa and the president Jacob Zuma is unlikely to have had a stress-free birthday on Wednesday.
His cabinet spring cleaning last week has, in the short term, created uncertainty in Africa’s sturdiest economy.
The replacement of the finance minister Pravin Gordhan with the pro-Zuma Malusi Gigaba has either made Mr Zuma’s position untenable or secured his full presidential term to 2019.
With a cabinet now reflecting his views Mr Zuma, the ANC’s former head of intelligence, is arguably now more powerful than he has ever been. But he might also find himself bundled out of office if he loses a vote of no confidence in parliament on April 18.
It had been argued that Mr Gordhan was too important to economic stability to be sacked, that if he went the rand would tumble followed by a ratings downgrade. Although the rand fell by 4 per cent following the reshuffle, in late trade on Wednesday it was 1.1 per cent higher at 13.8 rand per dollar. However, the ratings agencies Standard & Poor and Fitch have indeed downgraded the government’s credit rating to junk.
When a major credit agency cuts a country's credit rating to junk status, the assets do not normally respond by rallying. But it has not been a normal few weeks for South African markets, says the Financial Times. According to Citi, foreign investors have purchased more than 20 billion rand (Dh5.14) worth of South African government bonds since Mr Zuma's cabinet reshuffle. That includes a net 9.84bn rand of local government bonds last week.
On Friday, the same day Fitch made its cut, demand for the country’s benchmark 10-year debt was still high enough to actually send the yield down 0.055 percentage points. Yields fall when prices rise. Citi says the flows suggest “a consensus view that these political ructions are temporary, with an expectation that the global hunt for value in emerging markets will lead to a relatively quick snap back”.
But, if the ratings agency Moody’s follows suit with a cut to junk, South Africa’s bonds may be removed from the main international indices, a potentially disastrous situation.
The country is now on a knife edge. Politically there are fractures across the ruling African National Congress (ANC) party, with one wing calling for Mr Zuma’s head. Worse, if the economy implodes racial fault lines could rupture. Since apartheid ended almost 25 years ago, the black majority has seen limited advances in an economy still largely controlled by the white elite.
Much has been made of how Mr Gordhan brought financial stability and fought against corruption and at present it seems without him the economy is unsteady. But was he really effective? During his tenure debt has swollen to more than 50 per cent of GDP and the economy almost went into recession, growing by just 0.3 per cent last year.
Speaking to local investors at the Development Bank of South Africa on Wednesday, Mr Gigaba said the Treasury aims to stabilise net debt over the next three years at the 50 per cent of GDP level.
“To accomplish this we are tightly controlling expenditure,” Mr Gigaba said.
“Fiscal sustainability is a prerequisite for inclusive development ... we are therefore committed to the fiscal consolidation plans as outlined in the February budget.”
Mr Gordhan was favoured by the banks and the established businesses but there is one issue that has gone almost entirely unreported. Few picked up his declaration on the parliamentary register that he owns shares in the country’s four major lenders, Standard Bank, FirstRand Bank, Nedbank and Barclays Africa Group, previously known as Absa, worth 665,000 rand and shares in some of South Africa’s elite companies, including 141,000 rand worth in Remgro, owned by the white tycoon Johann Rupert. In total Mr Gordhan’s shares are worth 3.2 million rand, the equivalent to 15 years of earnings for the average South African worker.
The situation was far from usual, experts say. "Normally ministers have to sell shares or put them into a blind trust to avoid conflict of interest over carrying out ministerial duties," Sir John Graham, Britain's former chairman of the committee on standards in public life, tells The National.
“The finance minister is bound to be involved in a banking decision, so a blind trust would have made him entirely independent on making decisions on banking interests.”
At an ANC Youth League rally recently its leader Collin Maine put it more bluntly in referring to Mr Gordhan’s interests. “He was captured [by business] and had to go.”
Mr Gordhan’s shares ownership does raise questions over his judgment. When the four banks closed the accounts of the mining and media company Oakbay its owners the Gupta family asked Mr Gordhan for help. He initially agreed but then went to court to gain a ruling meaning he would not be legally obliged to intervene and reverse the banks’ decision. The Guptas, who are close to the president, now find themselves with Mr Gigaba, who does not have any shares in the big four. Whether that will benefit the family or not is unclear as yet.
Putting aside the Oakbay case, the turmoil of Mr Gordhan’s sacking and the cabinet reshuffle may now open the way for banking reform, breaking their monopoly. The Big Four lenders in which Mr Gordhan has shares may now face more competition, with licences perhaps given to potential competitors.
"This is a wake-up call for banks, that they cannot hold the country to hostage," Craig Kruger, the chief operating officer of the Durban fuel firm Limitless World, tells The National.
“This will definitely have a good effect on breaking up the banking sector monopoly. The Big Four have controlled our economy for years during apartheid and post-apartheid. If licence conditions are relaxed and more banks come into market that’s a positive outlook for the economy because for any economy competition is healthy.”
It now falls to Mr Gigaba to safeguard the rand, reform the banks, prevent a tumble to all-out junk status and generally pull South Africa out of the quagmire.
He has work to do. The public sector wage bill has grown while the economy is flat, power cuts have knocked more than 1 per cent off GDP and farming faces continued droughts, with agriculture’s proportion of GDP reduced by 16.2 per cent.
Total unemployment remains high at 27 per cent, and is worse among black youth at more than 40 per cent.
“Forget all the noise outside, do your job,” was the first piece of advice Mr Gigaba gave his staff. A protégé of Mr Zuma, the new finance minister has promised to carry out the president’s commitment to “accelerate radical economic transformation”.
This could mean a package of policies to redistribute wealth to the black majority that, while it has the vote, still suffers from what campaigners describe as “economic apartheid”.
Mr Gigaba has also warned that the Treasury will not be dominated by “orthodox economists and international investors” – shorthand for banks and oligarchs. At 45, he is young by ANC standards but he is steeped in ANC politics after eight years as the head of the party’s Youth League. He has had a meteoric rise, going from minister for public enterprises to minister of home affairs to finance chief in just seven years. While he has promised to keep Mr Gordhan’s fiscal limits set in February he will struggle with the country’s first cuts to junk status in 17 years.
“Gigaba will find himself in a Catch 22,” says Daniel Silke, the director of the Political Futures consultancy. “He will be on one of the steepest learning curves possible.”
ANC insiders say now is Mr Zuma’s last chance for a radical transformation of the economy. “The Treasury has always been headed by quite conservative finance ministers, well now that is set to change,” says one party source, requesting anonymity. “A criticism of Zuma has been that debt has risen on his watch, with him nominally in charge of the Treasury. Sink or swim, now he will be properly in charge.”
Some analysts say there may be worse to come for the economy. “We are a bit cautious about the idea that the ‘worst’ point has been reached,” the Citi analyst Adriaan Du Toit says, according to the FT. “First, because there seems to be momentum behind the negative ratings trajectory and we think that it is important to bear in mind that adverse ratings actions will trickle down to state owned corporations and that the downgrades could lead to jitters about mandate/index expulsions. Second, because we do not think political power has shifted enough to justify outright bullishness.”
Still, despite the current turbulence, South Africa remains a positive destination for investment. Mr Gordhan has gone and life goes on. Even the rand is looking stronger than had been feared.
It might well be, as some say in Johannesburg, that “no one man is bigger than the economy”.
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