Impact of Gordhan 'arrest' will be 'swift, awful'

Finance Minister Pravin Gordhan.
Finance Minister Pravin Gordhan.

Cape Town - Should Finance Minister Pravin Gordhan be arrested for his involvement in the South African Revenue Service's (Sars') so-called rogue unit, it will have a swift and awful effect on the markets and completely shake confidence in the country's economy.

This is according to one of the country's leading economists, Mike Schussler of, who was responding to weekend reports of Gordhan's "imminent arrest" after the Hawks handed a docket over to the National Prosecuting Authority (NPA) for his involvement in the rogue unit.

If Gordhan does get arrested, it would be the first time a major country takes its finance minister into custody, said Schussler, adding that the effect on financial markets would be "awful and quick".

"The rand will decline probably to between R18 and R20 (per dollar) very quickly. It would do so because the markets will believe that something is fishy," said Schussler.

On Monday afternoon, the rand was trading sharply lower at R15.58/$ compared with Friday's close, but 10c firmer from its early morning slump to R15.68/$.

According to Thomson Reuters data, this is the unit's weakest level since March 17.

According to Schussler, Gordhan is trying his utmost to restore financial and economic confidence following the "9/12" disaster by engaging with and taking unions and business into his confidence. Schussler also highlighted Gordhan's investor roadshows to the UK and US as positive for the rand and the economy as a whole.

"9/12" refers to December 9 last year, when President Jacob Zuma unceremoniously sacked then finance minister Nhlanhla Nene, replacing him with the unknown David Des van Rooyen. Van Rooyen’s appointment lasted only four days before Gordhan was recalled to his old post.

The aftermath of the event has been well documented and founder Alec Hogg calculated the immediate loss to the country as R500bn.

"The credibility of it all is now already shaken and it will be completely broken should this [Gordhan's arrest] happen. Everyone sees this as a fight for the heart of the government, with people who want to raid our taxes and state-owned enterprises against those who want stability and honesty," said Schussler.

Consumers would feel the brunt

Sketching a picture of doom and gloom, Schussler said consumers would feel the brunt of the impact as a weaker rand would cause price increases in goods from petrol to maize to paraffin. "It would hurt poor people the most," said Schussler, adding that it could also become a "matter of life and death" as medicines would be impacted.

"Medicines are one of our biggest imports and will also cost more - but over (the space of) about a year as government only allows price adjustments once a year. This could in the meantime lead to shortages as pharmaceutical firms may decide not to import medicine they do not make money on. This can become a matter of life and death."

Schussler warns of a long-lasting snowball effect that would include interest rate and tax hikes.

On a macroeconomic level, he said a further downgrade to junk status - now even more likely - would make government debt more expensive, which in turn would lead to less money for basics such as education and health. Social grants would also suffer as money would be spent on servicing debts, Schussler warned.

He said economic growth would further deteriorate as consumer and business confidence, which is closely linked to growth, would take a hit.

"This situation is very, very catastrophic for the economy and for us, the people of this country. Yes, the financial markets will show signs of strain but we the people will feel the pain in higher prices, fewer jobs, higher interest rates and less government money to help out.

"Our children will feel the pain as school books may not get replaced or schools will not be built as quickly as needed. Our firms will find life tough and they will feel the need to batten down (the hatches) even more."

On the impact on foreign investment, Schussler said many international firms and investors may never trust South Africa again. "We have many investors who are still prepared to invest here, even while the returns have not been great. They will feel that it may be time to leave. When that happens, then maybe R20 to the dollar may be an optimistic scenario."

Schussler said there needs to be a clear statement from the Hawks and the NPA that they are not probing the finance minister at all. "For now, Pravin should be a no-go area."

The NPA told News24 on Sunday that it has not received a docket from the Hawks for a decision on whether to prosecute Gordhan.

"As far as the so-called rogue unit matter is concerned, which is [being] investigated by the Hawks, our prosecutors are actually guiding that investigation," NPA spokesperson Luvuyo Mfaku told News24.

"That matter is still under investigation. No decision has been taken whether to prosecute or not."

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