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Azar Jammine: Answering big money movers’ question – will Gordhan be fired?

Distance has always helped provide perspective. That is a blessing when assessing noisy places like South Africa, especially when this young democracy experiences the worst of its growth pains. It also helps to remember that while it is the centre of the world for those intimately involved, SA’s economy is only half of one percentage point of the global total.

That makes it relevant only at the very margin. Like an exception report for auditors. And right now, there is only one question those who control international capital flows are concerned with: Is Pravin Gordhan going to be fired?

In this excellent analysis, Econometrix’s Azar Jammine offers a heartening answer. The Johannesburg-based economist extricated himself from the immediate surroundings to offer a rational assessment. The dogs will always bark, but the caravan moves on. Sometimes we pay too much attention to the barking. – Alec Hogg

By Azar Jammine*

The past week has seen several issues at play suggesting that the ruling party is indeed “at war with itself” like never before.

It is split down the middle between those arguing that the party lost considerable ground during the local government elections due to corruption and State capture; and those on keen to maintain the status quo so that they might benefit personally from such circumstances.

In support of the first group would appear to be not only most opposition parties, but also all those ANC stalwarts railed against what they see as an unsavoury direction in which the party that they had supported for many years, is taking.

Included in this group appear to be the leadership of the ANC in Gauteng, the Communist Party, much of Cosatu, certainly non-Cosatu trade unions, as well as even possibly Deputy President Cyril Ramaphosa.

On the other hand, those keen to maintain the status quo include the ANC Women’s League and the ANC Youth League and those who remain loyal to President Zuma. This latter group also appears to be aligned to the election of Zuma’s ex-wife, Nkosasana Dlamini-Zuma as his successor.

If one looks purely at the media hype calling for Zuma’s head as president of the country, one would be tempted to suggest that he is unlikely to see out the remaining term of his office. However, predictions of his exit from the scene as leader sooner rather than later, have been notoriously off the mark.

Instead, focus on the fact that no less than two thirds of the ANC’s National Executive Committee (NEC) are Zuma acolytes, suggests that in the final resort, it is the support the president receives from this NEC which sustains his tenure.

Even here, however, one is beginning to question whether that traditional loyalty might not be wilting. From comments made by Deputy President of Cyril Ramaphosa and ANC Treasury General Zweli Mkhize, one is beginning to wonder whether Zuma is still maintaining support from his inner circle.

Key to ratings outlook 

All these comments are relevant in the context of what has come to be seen as the issue of “State capture”.

This issue in turn is entirely pertinent with regard to expectations as to whether or not South Africa’s foreign debt will come to be downgraded by leading credit ratings agencies when they review the country’s credit ratings in just over a month’s time.

In past comments, ratings agencies have suggested that there are three main prerequisites for maintaining an investment grade credit rating.

Gordhan_charges


Cartoon courtesy of Twitter @brandanrey

Firstly, a government needs to convince the ratings agencies that it is committed to fiscal discipline, i.e. maintaining a reasonably small budget deficit, small enough to prevent public debt levels from rising.

Secondly, it is essential for the government to ensure that SOEs are properly managed in such a way that they do not rely on government guarantees to bail them out.

Thirdly, economic growth has to be improved on a sustainable basis in order to help boost tax revenues in such a way as to sustain levels of government expenditure.

The problem more recently is that nervousness surrounding the issue of “State capture” has cast doubt on the government’s ability to achieve all of these three.

In a speech back in February, Finance Minister Pravin Gordhan defined State capture as a situation in which “the private sector and criminal networks band government laws and regulations to their benefit through corrupt transactions with officials and politicians”.

The most important private sector party identified by many with such practices has been the Gupta family.


With witnesses such as the Deputy Minister of Finance arguing that the Gupta family was instrumental in offering him the post of Minister of Finance to replace Nhlanhla Nene last year, fears have gained momentum that close connections between the family and the presidency had resulted in such private sector interests trying to ensure that they obtain deals involving SOEs which can benefit themselves enormously.

Under such circumstances, if, for example, Pravin Gordhan were to be replaced by someone who is seen to be amenable to relaxing fiscal discipline, ratings agencies fear that this would result in an abandonment of fiscal stability and the entry towards a path of unbridled debt and financial collapse.

Concern lies with the process of procurement

The most important way in which concerns regarding the cost of “State capture” is seen to jeopardise fiscal rectitude is through the process of procurement.

Essentially, deals are reached involving SOEs or other public entities to purchase goods and services from other SOEs or entities at above prices which would normally have been charged.

A few years ago in a budget speech, Gordhan referred to the fact that certain public entities were purchasing bread at prices four times what such bread would normally be available.

Another similar suspicion is that Eskom has been buying coal from mines owned by the Gupta family at prices more than double those available from other sources.


In opposition to such exploitation of procurement processes, the National Treasury in its wisdom introduced the office of the Procurement director in 2013.

The person in Treasury in charge of Procurement has now come under fire from sources trying to move him out of his position as he is seen as a stumbling block to the facilitation of procurement processes which might be termed part of the “State capture” syndrome.

Opponents have suggested that Kenneth Brown, in charge of Procurement, is guilty of certain misdemeanours. Treasury in turn has argued that it will only look into such accusations if proof is provided to it of such misguided actions on the part of the Procurement leadership. Thus far, no such evidence has been forthcoming.

If one uses the order of magnitude presented by Pravin Gordhan in a speech to the Western Cape’s Chamber of Commerce two months ago as a guideline, elimination of just a quarter of this kind of mispricing deals aimed at benefiting certain connected individuals, would amount to as much as R40bn in savings on government spending. This amounts to more than 3% of government’s total budget.

Another area where one can quantify potential government savings through corruption is in the form of the potential elimination of R26bn worth of irregular, wasteful and unauthorised expenditure by municipalities (based on the Auditor General’s findings).

Forces against “State Capture” building momentum

Fortunately, in the past few weeks and months there appear to have been enormous forces both from within the opposition and from within the ruling tripartite Alliance itself, against the notion of State capture and in particular against the perceived power of the Gupta family specifically.

Against this, moves such as that of the NPA to charge Pravin Gordhan for what appear to be relatively minor transgressions of administration, have heightened the perception of the state capturers trying to make Gordhan’s position as Minister of Finance unsustainable.

In turn, if Gordhan were to be replaced, the probability is that many senior members of National Treasury would also resign their posts, leaving the Treasury to the wolves of populist exploitation to the detriment of the country’s public purse.

Against this now, Gordhan himself as come out with guns blazing, claiming evidence of R6.83bn worth of dealings by the Gupta family which were corrupt and unethical.

Many parties, including leading CEOs and representatives of ANC stalwarts have come out in open support of Gordhan and his integrity. More recently, even Deputy President Cyril Ramaphosa has come to Gordhan’s support.

Besides, President Zuma himself issued a statement two weeks ago pledging his support for Gordhan in his position as Finance Minister.

Under such circumstances, it seems highly unlikely that the president would move to embark upon a Cabinet reshuffle that would see Gordhan leaving his post.

Gordhan himself has made it abundantly clear that he is not for moving of his own accord and stands to deliver the Medium-Term Budget Policy Statement (MTBPS) next week.

This is in response to continuous rumours that Gordhan will not survive as Minister of Finance even for the next 10 days.

Clarity on credit ratings over the next two weeks

Many have argued that the political rumblings surrounding Gordhan’s position had virtually ensured that the country will receive a credit ratings downgrade in a month’s time.

Whilst admitting that the recent shenanigans are not conducive towards building confidence in the macroeconomic stability of the country, the fact remains that Gordhan is still in charge, Treasury is still holding the public purse under significant scrutiny and besides, there are two important other developments besides the MTBPS within the next fortnight, which will have an important bearing on credit ratings.

Gordhan_Hawks_tightrope

Firstly, on 1st November, the interdict against the publication of the report on “State capture” by the former Public Protector Thuli Madonsela, is due to be heard. The following day, Gordhan himself is due to testify in court.

These developments could actually turn the mood into a much more positive one with regard to the stability of South Africa’s fiscal stance and the resilience of its public institutions including judiciary. These may in fact turn out to be positive developments for the country’s credit rating outlook.

In conclusion, we remain far from convinced that the country’s credit ratings will indeed deteriorate, even if there is a substantial chance that that does turn out to be the case.

Exaggeration of political influences on financial variables

It is in light of this context that one remains somewhat bemused by the extent to which observers keep relating movements in South Africa’s financial variables to political developments locally.

Time and again in recent months we have shown evidence of the fact that even though political developments do have some influence on currency movements and on fluctuations in the JSE, far more dominant have been the influence of expectations as to what is going to happen to US interest rates.

Frequently, domestic political developments have happened to coincide with changes in perceptions about risk appetite for emerging markets based on interest rate expectations abroad. This has confused the interpretation of the influence of domestic political developments.

Even in the past week, the Rand depreciated significantly because of the decision by the NPA to charge the Minister of Finance, but what was not recognised sufficiently was that this currency weakness also happened to coincide with a renewed “risk off” environment, in which US interest rates are now expected to rise before year-end in contrast with the expectation a few months ago.

South Africa

This is not to suggest that domestic political factors are unimportant. They do play a role and are likely to keep the Rand from appreciating unduly. However, unless Gordhan himself is replaced, which we regard as unlikely in the short to medium term, we do not see a sell-off in the South African currency either at least in the next few weeks.

Even after that, it is unclear as to precisely what is meant by a credit ratings downgrade and by which credit ratings agencies and what the impact would be on the Rand.

For example, we already know that the spread between foreign interest rates and South African long-term interest rates has traded at levels in excess of corresponding spreads with bonds of countries whose credit rating has already been downgraded to junk status.

In other words, it is unclear as to how much of South Africa’s currency weakness has already discounted adverse information with regard to credit ratings outcomes.

  • Dr Azar Jammine is the chief economist at Econometrix.

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