The scenario planners are out, as the knives circle finance minister Pravin Gordhan. And unfortunately this is not the first time, and if he survives this current onslaught, one can be forgiven for being pessimistic in saying it won’t be the last. But what does this all mean for a South African economy that is on the crescendo of junk, with a weakening rand fuelled by this uncertainty, and more so global factors? Azar Jammine sinks his economic mind into this unfolding saga. He says the economy is on a fascinating knife-edge, and much good can come out of the current turmoil with an outside chance of disaster. A must read. – Stuart Lowman
By Azar Jammine*
Crescendo of Criticism of Perceived State Capture by Zuma Acolytes
The past week has been fascinating in terms of the crescendo of opposition to and anxiety caused by perceived attempts at “state capture” by president Jacob Zuma and his acolytes. In the face of attempts by the Hawks to threaten the rest of the Minister of Finance, there has been an explosion of concern that such moves represent thinly-veiled attempts by President Zuma and some of those close to him to rationalise a Cabinet reshuffle which sees Pravin Gordhan being replaced by someone more pliable and less opposed to their attempts to gain control of state finances and the procurement processes of SOEs.
Such concerns escalated dramatically on Tuesday with the story that President Zuma had organised for himself to take charge of a newly formed Coordinating Council for SOE strategy. This was seen as a direct attempt by Zuma to be able to lay his hands on lucrative deals surrounding such organisations. Already there have been several areas where such suspicions have arisen.
There are suggestions that Eskom has agreed to deals with coal mining companies whereby the utility is set to pay far above market prices to procure its coal in order to benefit politically connected owners of the coal mines, led by the Gupta family. Then there are the suspicions that Eskom is trying to arrange a trillion rand deal with Russia to build nuclear power stations with Zuma and those close to him standing to benefit from such a deal.
Thirdly, there are stories surrounding the armaments SOE Denel trying to arrange deals which will benefit Gupta-related companies.
Fourthly, there appear to have been attempts, subsequently denied by the Minister of Transport, to halt an investigation by the board of passenger rail agency Prasa to investigate questionable procurement deals undertaken by its former CEO Lucky Montana.
Fifth, there is concern that the attempt by Gordhan to link the granting of a R5bn guarantee to South African Airways predicated on the airline reconstituting its board to exclude Zuma’s close confidante and current SAA Chairperson, Dudu Myeni, is one of the very reasons the president might be trying to get rid of Gordhan.
These are seen as being but the tip of the iceberg of attempts by the President and those close to him to gain access to funds and deals which might enrich them at the expense of the efficient running of these organisations.
The Fear of Total Economic Meltdown if Gordhan Removed
It is difficult to find articles in the media justifying the move by the Hawks to gun for Gordhan. There is an overwhelming outcry based on the fear of the economic implications of the mooted potential arrest of the Minister of Finance. One by one, various members of the ANC or Communist Party, business leaders and academic economists (whose efforts we have publicly supported) have been coming out in support of Gordhan in an unprecedented outpouring of fear regarding what his removal might bring about.
More magic available at www.zapiro.com.
The underlying concern is that such a move could threaten a vicious circle of declining currency and economic growth. The principal concern of credit rating agencies is of an inability of the South African government to limit the rising trend of its public debt, with a particular risk being the call-up of R500bn worth of guarantees provided by the state to SOEs in the event that they cannot meet their liabilities. Accordingly, there can be no doubt that a replacement of the current fiscally- disciplined Gordhan in the midst of concomitant “capture” of SOEs, would be seen to raise the risk of populist spending, leading to credit ratings downgrades to junk status. The trouble is that the spiral of downgrades need not end with a mere one notch downgrade.
Read also: Gordhan: 'I don’t know whether I did the right thing taking this job?'
The threat of such downgrades could set in motion huge withdrawals of capital which would see the currency plunging to levels that would compel the Reserve Bank to raise interest rates in such a way as to drive economic growth downwards sharply, threatening still further credit rating downgrades. This is because sharply higher interest rates and sharply reduced tax revenues due to lower growth would be associated with an acceleration of government borrowing.
The latter could get out of hand if populist policies were pursued with abandon. Ironically, there is a precedent just to the north of South Africa for such a spiralling degeneration of economic growth and rising debt in the guise of Zimbabwe. We all know how that ended up with the government printing money to pay its way. It is fascinating to note that President Mugabe faces a renewed threat of revolt from amongst his own police force and defence force on account of the government’s inability to pay salaries to the teams given responsibility to maintain security. Under such circumstances, there is no telling how far the Rand could depreciate.
Fortunately, Enough People with Common Sense
With a smidgen of precedent for the above situation materialising in the form of market reaction following the replacement of former Finance Minister Nhlanhla Nene in December, one would like to think that there are sufficient forces within the ANC itself to recognise the dangers of the current situation and to prevent it coming to pass. On the contrary, in the midst of such growth in opposition to corruption and state capture, one can contemplate a countervailing positive energy which might bring about such a concerted effort to prevent further economic degeneration, with the concomitant huge savings to be made in avoidance of irregular, unauthorised and wasteful expenditure by the government.
Coalition governments in leading cities of the country could expedite the fight against corruption. Gordhan himself last week was quoted as suggesting that if even a quarter of state capture were prevented, this would save the government R40bn, or 1% of GDP. The intimation is that state capture amounts to 4% of GDP. Imagine if such savings were redirected to other more worthy causes.
FinMin Gordhan @TheEconomist - SOE's cannot continue to become a burden on our society.
— Edward Kieswetter (@EdKieswetter) July 28, 2016