Removal of Gordhan: The road to ruin

International investors see President Jacob Zuma’s Cabinet reshuffle as a change in policy direction that will ultimately leave the country’s finances in a big mess.

Fitch Ratings said that this move would see “radical socioeconomic transformation” getting priority over fiscal discipline and the moves to improve transparency and governance of state-owned enterprises (SOEs) would be halted.

“SOEs’ liabilities, and therefore contingent liabilities to government, will probably grow more rapidly, particularly if a plan to postpone the commissioning of new nuclear power stations to 2037 is reversed,” Fitch said.

“The political backdrop increases the risk that government will resort to costly expenditure measures or legislation that will weaken economic growth to stabilise its support.

“These developments, together with relevant policy announcements from the new Cabinet, could result in Fitch reviewing its ratings on the South Africa sovereign,” Fitch said.

Fitch and S&P Global Ratings both have South Africa rated on the last notch of investment grade, while Moody’s Investor Services has the country two notches above “junk” status.

Zuzana Brixiova, a Moody’s analyst and lead sovereign analyst for South Africa, said: “Fiscal and economic policies are an important factor in our assessment of a country’s credit profile; we will closely monitor any potential policy implications of this recent development.”

Local consumers are going to bear the cost of the clumsy way in which Zuma handled his Cabinet reshuffle this week.

The rand was the biggest casualty, losing as much as R1.31 to the dollar from R12.31 for a greenback early on Monday as investors worried about what would happen at National Treasury.

The weaker rand will increase the cost of imported goods such as petrol, boost consumer inflation – which is a key measure used in setting interest rates – and place consumer spending under pressure, but will be welcomed by local exporters, such as the mining industry.

Uncertainty related to the changes at Treasury means that the country’s investment grade rating – key to the local level of borrowing costs – as well as business and consumer confidence, both vital for economic growth, are again going to be under pressure.

The latest move resembled Zuma’s firing of Nhlanhla Nene as finance minister in December 2015, which caught everyone off guard and caused the rand to fall to its weakest level in history. JSE stocks – especially banks and financial services companies – lost tens of billions in market value.

However, this time there had been speculation for months that Zuma would drop Finance Minister Pravin Gordhan from his Cabinet owing to ongoing tension between the two.

Gordhan has clashed with Zuma allies, including SA Revenue Service (Sars) commissioner Tom Moyane and SAA chairperson Dudu Myeni.

However, on Friday, Sars spokesperson Sandile Memela declined to comment on the changes at Treasury, saying the organisation was not concerned with political developments.

Zuma and Gordhan have differed over “radical economic transformation”, with Zuma taking a view aimed at rectifying the skewed racial ownership of wealth in the country, while Gordhan’s view was more investor-friendly.

On Monday, speculation about the future of the finance ministry reached fever pitch when Zuma ordered Gordhan and his Treasury team to return home from an international road show in the UK and the US.

Early on Friday morning, Zuma announced that Malusi Gigaba would be the new finance minister and Sifiso Buthelezi would replace Mcebisi Jonas as deputy finance minister.

Gigaba on Friday held talks with Gordhan, National Treasury director-general Lungisa Fuzile and members of the Treasury executive committee.

Nedbank chief economist Dennis Dykes said the Cabinet reshuffle was a disaster and that Gordhan and Nene before him had done a good job.

“Gigaba doesn’t have that portfolio on his CV, so I think it’s definitely going to be a learning curve for him,” he said, adding that Treasury at least had competent staff to support him and that the worst thing would be if key staff members were to leave.

Dykes said although Gigaba has had numerous other portfolios, handling finances might be like asking a motor vehicle driver to fly a plane.

“The concern of the markets is to ensure money is spent properly,” he said.

George Glynos, ETM managing director, said that the reshuffle was clearly based on a political vendetta and that Gigaba’s lack of experience in the sensitive portfolio was a huge concern.

He pointed out that the country could no longer avoid a credit rating downgrade.

The uncertainty around Gordhan’s exit caused the JSE to lose ground on Friday, but the biggest losses were in banking and financial stocks.

The JSE Fini Index, which includes the top 15 financial stocks, lost 6% for the week, while the banks index lost 10% and the financial index dropped 5%.

The 10-year government bond weakened to 9.04% – its most expensive level since February 2016 – before being quoted at 8.83% on Friday afternoon.

On Friday, Gordhan blamed the reshuffle for the failure of a routine auction of short-term bonds that same morning.

There were R600 million worth of bonds on offer, but bids for only R200 million were received, he said.

There was support for Zuma’s move from some quarters, but the decision to drop Gordhan was largely met with criticism and unhappiness.

Deputy president Cyril Ramaphosa told eNCA that he didn’t agree with Zuma’s reasoning, which was based
on a dubious “intelligence report”, for removing
Gordhan.

Ramaphosa said Gordhan was serving with “absolute distinction” and his removal was “unacceptable”.

However, Ramaphosa, who is looking to replace Zuma as ANC president in December, said he wouldn’t resign.

Business Leadership SA, which represents many of South Africa’s major companies, said that the manner and timing of the Cabinet changes were not in the economic interests of the country.

On Thursday, the SA Communist Party (SACP) confirmed reports that Zuma had informed them on Monday of his intention to effect a Cabinet reshuffle and get rid of Gordhan and Jonas.

SACP deputy general secretary Solly Mapaila said that Treasury must be handled with care.

Sizwe Pamla, a Cosatu spokesperson, said that Zuma didn’t consult the trade union federation on his plans to reshuffle his Cabinet.

Pamla said that Cosatu didn’t have any personal issues with anyone at Treasury, but they had ideological problems with the institution. Cosatu, the SACP and the ANC together form the tripartite alliance.

“There is a cultural and ideological shift that is necessary [at National Treasury],” Pamla said.

Black Business Council president Danisa Baloyi said in a statement issued on Friday that the business community should “engage the tough headwinds”.

“We further urge that the new finance minister continue to exercise fiscal prudence, a painful but necessary measure that is required to stabilise our economy.”

President of the Progressive Professionals’ Forum, Mzwanele Manyi, said that there was finally certainty in the finance portfolio and that the organisation had confidence in Gigaba.

National African Federated Chamber of Commerce and Industry president Lawrence Mavundla said the organisation supported the reshuffle of Cabinet and saw it as exactly what the country’s radical economic transformation agenda needed.

Mavundla also said that it was not fair that there were “superministers” who could not be reshuffled and that the organisation had full confidence in Gigaba and Buthelezi.

Black Management Forum president Mncane Mthunzi said he would comment at a later stage.

Cassim Coovadia, managing director of the Banking Association of SA, said he was extremely concerned about how the Cabinet reshuffle was done and that it definitely didn’t bode well for the economy. The association would, however, still work together with the new minister and his deputy.

Esmé Arendse, a Nedbank spokesperson, said that, like many South Africans, Nedbank was particularly disappointed by the removal of Gordhan and Jonas.

“The risk of a further downgrade of South Africa by international ratings agencies is unfortunately once again a real possibility,” she said.

GORDHAN’S REBUTTAL

Deposed finance minister Pravin Gordhan used his dramatic farewell press conference on Friday to direct a number of uncharacteristically blunt parting shots at National Treasury’s many enemies.

“Over the past 15 or 16 months, we have been subjected to the most horrific attacks on the work that we do and the budgeting process,” said Gordhan.

He singled out the team from Gupta-owned news station ANN7 at the briefing, while the 200-odd Treasury staff in the room booed loudly.

“Does ANN7 have a question? They have a lot to say when they want to attack us and malign us, and try to disgrace us,” said Gordhan.

“Why must we constantly deal with people who are never seen in the public domain, but they mastermind these public attacks?

“They make false allegations, pay someone called Bell Pottinger ... PR firms are hired, millions of rands are spent. To do what? To malign democratic institutions?

“You can’t have fake news and fake Twitter accounts, and be attacking family members. That is not fair play. Be open. Be transparent.”

Gordhan also hit out at Tom Moyane, the commissioner of the SA Revenue Service, without actually naming him.

Moyane recently called a press conference to complain about Gordhan and this week, while briefing Parliament’s standing committee on public finance, he came out guns blazing against those who criticise the revenue service.

“No other head of an institution talks about, or to, the political head that he is responsible to in the manner that he does and gets away with that,” said Gordhan.

He hit out at state arms manufacturer Denel, which is challenging Treasury in court over its blocking of a joint venture with VR Laser, a Gupta-linked company.

“Why is Denel going to court, insistent on VR Laser?” asked Gordhan.

“In what circumstance do you get the chairperson of the board of a state-owned enterprise attacking a minister of government publicly ... Why isn’t that person called to account and told to behave?”

Former deputy finance minister Mcebisi Jonas made the same ominous point several times: South Africa is heading down the road to state failure.

“If you look at events over the past couple of years, you see certain patterns. Certain interests are being protected, consolidated and deepened. The State of Capture report ... consolidates the picture of a state and institutions increasingly becoming vulnerable.

“You don’t need to be a genius to see the trend in the country.

“You have in front of you history unfolding ... a democracy being undermined and the diversion of state resources to serve particular interests. You need to connect these dots.”

Gordhan said he and Jonas were now just normal members of Parliament and “will do whatever we are asked to do by our organisation”.

Asked about a potential walkout by loyal staff, including Treasury’s director-general Lungisa Fuzile, Gordhan said officials “would make up their own minds”.

- Dewald van Rensburg

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