SA will crash of Gordhan goes

2016-10-16 12:51

The relatively trivial nature of the charges against Finance Minister Pravin Gordhan – and the way in which the prosecution has been pursued – leads one to conclude that the charges are trumped up.

It also suggests that Gordhan is being prosecuted for reasons unrelated to the law-and-order mandate of the body that has laid the charge, the National Prosecuting Authority (NPA).

It is shockingly obvious that the only way to explain the charge against Gordhan and his two co-accused – former SA Revenue Service (Sars) commissioner Oupa Magashula and former Sars deputy commissioner Ivan Pillay – is malicious intent.

The charges are widely viewed as an attempt to remove Gordhan from office without formally firing him, or to justify firing him soon.

These developments bode ill for South Africa.

Because of the nature of events – including circumstances behind the firing of former finance minister Nhlanhla Nene in December – all reasonable observers will expect the quality of financial management to deteriorate in a post-Gordhan scenario. They will expect that the reason for Gordhan’s removal is to loosen controls over Treasury.

Most will expect that the budget deficit will rise, unaffordable projects will be s

upported for bad reasons, state-owned enterprises that are under incompetent management will get more bail outs, guarantees or capital injections, and government finances will quickly deteriorate.

Ratings will fall, funds will leave South Africa and the rand will grow even weaker.

South Africans with assets will seek to move them abroad, and younger South Africans with marketable skills will look for jobs in countries with better prospects, including many in Africa. Simply put, it will be a train smash.

But how did it get to this? What lies behind this latest attack on the minister?

Gordhan’s record

Gordhan has served two stints as finance minister – from 2009 to 2014, and again when he was asked by President Jacob Zuma to return in December after abandoning the disastrous appointment of Des van Rooyen.

When he first assumed office in May 2009, he faced the task of helping to lead South Africa out of a recession brought on, in part, by the global financial crisis.

But the constraints on him were not that severe then. South Africa had run a budget surplus for two years in the financial years ending 2007 and 2008.

There were reasons for the surpluses.

One was that far better tax collection and management systems were developed by Gordhan and his team from the time he was Sars deputy commissioner in 1998.

In addition, the budgeting policies of then finance minister Trevor Manuel gave taxpayers confidence that their money would be used well.

Moreover, growth and profit rates were higher than expected in the mid-2000s.

Manuel’s team steadily brought down the debt owed by Treasury to the relatively low level of 28% of gross domestic product (GDP) in 2008.

In addition, South Africa’s banking system survived the global financial crisis better than many, thanks partly to good supervision by Sars and the Treasury, and partly thanks to the relatively good margins – by global standards – they earned. Strong finances meant that bold expansionary policies were possible in 2009 to countervail the crisis.

South Africa confidently swung from a small budget surplus of 1.7% in 2008 to a small deficit of 1.1% in 2009 and a very large budget deficit of 6.6% in 2010.

The expectation remained that the global economic crisis was of limited duration and that our economy would turn around when the rest of the world did.

These expectations lasted several years, and consecutive budget deficits of well over the unwritten guideline of 3% followed each other without great concern.

Fiscal consolidation begins to bite

Gordhan and Treasury had a cushion of low debt in his first term as finance minister in 2009.

But in spite of prudent policies under his successor, Nene, government debt had risen to levels that had the ratings agencies doing their sums this year.

Was it going to be greater than 50% of GDP? How much greater than 50% and for how long? Fifty percent had become the red line for budget deficits since the 1990s.

The latest budget review is forecasting gross government loan debt to GDP at 50.9% for the 2016/17 financial year.

As a responsible government leader, Gordhan had to continue down the fiscal consolidation path along which Nene resolutely marched.

Fiscal consolidation means saying “no” to spending more, and “no” to guarantees being issued to spendthrift state-owned entities.

Gordhan had other pressures to contend with – during his first term as finance minister, the economy grew by 2.5% to 3.5%.

This was lower than in the mid-2000s, when South Africa grew at an average of 5.5% a year.

Although not optimal, the situation was still manageable. Suddenly, in 2015, the expectation fell to between 1% and 2% growth.

Come 2016, the question was: would South Africa grow at all, and if it did, would growth be closer to 1% or to 0%?

This massive deterioration in expectations derives from several factors.

Firstly, the recession in 2009 was far worse than many thought.

Because the banks didn’t fail, some people were sanguine – despite the fact that the country lost 8% – or more than 1 million – of all jobs.

South Africa’s crisis was particularly bad as it was hit by a double whammy.

Like many developed countries, it suffered a consumer credit crunch – households had overborrowed and had to cut back sharply when economic conditions tightened.

And, like many developing countries, South Africa suffered an export price and volume crunch.

Prices and levels of demand for its main exports fell sharply as slower growth affected economies around the world.

Secondly, levels of confidence fell to record low levels. One index fell to levels not seen since 1985.

That was the year in which then prime minister PW Botha delivered what became known as his “Rubicon” speech, which gutted business confidence and led to his, and apartheid’s, downfall.

Similarly, 2016 has had flailing political leadership.

Economic growth has been weaker than many other developing countries. For example, while Africa’s performance has deteriorated, South Africa’s has become worse, faster.

Unless the malicious prosecution of Gordhan is halted, our economic performance will continue to be far poorer than it needs to be. Average per capita incomes may continue to decline in real terms for South Africans, as they have since last year.

This will affect the poor most severely.

Hirsch is professor and director of the Graduate School of Development Policy at the University of Cape Town

This article was first published by The Conversation


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Read more on:    npa  |  sars  |  oupa magashula  |  nhlanhla nene  |  pravin gordhan

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