question of whether the government will forge ahead with an expensive nuclear
build programme regardless of its affordability has become the focus of concern
that South Africa’s track record of sound financial management will be
undermined by the policies decided by President Jacob Zuma’s new Cabinet.
Ratings Agency highlighted the threat when it cut SA’s credit rating to junk
status on 7 April, warning that under the newly appointed finance and energy
ministers the programme was likely to move ahead more quickly, requiring
further financial guarantees which would weigh on the government’s balance
view political differences over implementation of plans to expand nuclear power
in the country preceded the abrupt dismissal of former finance minister
Nhlanhla Nene in December 2015 and may also have contributed to the sweeping
reshuffle which resulted in the removal of former finance minister Pravin
comments tapped right into the mounting anger and helplessness felt by many
South Africans over the way in which corruption and state capture appear to be
gathering momentum, and the apparent inability of the ANC to rein in Zuma’s
reckless agenda for the country’s fragile economy.
Nuclear deal speculation ‘overdone’
the threat may be, since the shock Cabinet reshuffle there has been a spate of
misleading media reports presenting the existing schedule for the nuclear
programme as completely new and suggesting that a shady deal over the estimated
R1tr project is already done and dusted.
experts believe that the speculation has been overdone and power utility Eskom,
which was given control over nuclear procurement plans late last year, issued a
statement on 10 April denying that a deal had already been signed.
opinion, there are too many people involved in the deal for it to be done
behind closed doors,” said Chris Yelland, investigative editor at EE
Publishers. “If things are done incorrectly, it’s bound to get out. A lot of
people are watching very closely – NGOs, the media and civil society.
Government leaks like a sieve and it’s just too big to be done secretly.”
immediately after the Cabinet reshuffle was announced on 31 March, a story
surfaced that the new finance minister, Malusi Gigaba, had signed papers for
the nuclear deal on his first day in office. On the weekend of 9 April, two
leading newspapers carried reports detailing the timeline for the programme,
citing internal Eskom documents dated just a few days before Gordhan and his
deputy, Mcebisi Jonas, were axed.
In fact, the
information was released by Eskom weeks ago, and reported by other
publications. The utility issued a request for information from nuclear vendors
in December, saying that a request for proposals would be issued by the middle
of 2017 and that by early 2018 the preferred bidder should be selected, with a
contract in place between the end of 2018 or early in 2019.
What was new
in the weekend stories was that most of the nuclear contracts would be
implemented through “turnkey procurement”, which means that a single company
would be appointed to manage and deliver an entire project. That means the
management company would be responsible for appointing all contractors and
service providers – a policy that makes corruption easy to conceal.
rumour that appeared just before Zuma recalled Gordhan from London was equally
alarming – former ANC MP Vytjie Mentor was quoted as saying that a Russian
participant in one of the minister’s investor presentations left the room when
Gordhan said the government would “never” develop nuclear energy, and then
called another Russian who immediately called Zuma. This was the real reason
for which Gordhan was fired, the reports alleged.
obvious question marks raised by the purported events, the main discrepancy is
that Gordhan had never said the nuclear project would not go ahead – he
repeatedly pointed out that it was part of the state’s planned energy mix but
would not be implemented at a pace or scale which the country could not afford.
This is exactly what Gigaba said at his first press conference.
No faith fiscal policy will be retained
is that few have any faith in Gigaba’s insistence that SA’s fiscal framework
will be adhered to, least of all Standard & Poor’s and Fitch, which both
cited the policy uncertainty generated by the Cabinet reshuffle as one of the
main reasons for their decision to downgrade SA’s sovereign credit rating to
Comments by Enoch
Godongwana, the ANC’s head of economic transformation, were also taken with a
large pinch of salt. He said that the government’s expenditure plans –
including for the nuclear programme – would have to be revised in light of the
country’s junk status, which raises the cost of its borrowing.
now is the separation between the ANC and government,” said Nomura emerging
market analyst Peter Attard Montalto.
point at the moment is that the ANC is far less important than Zuma’s own
policy agenda. Oversight will be reduced and if Treasury stops asking for
information (on the nuclear deal) which can be shared, he will get away with
that three top ANC officials – secretary general Gwede Mantashe, deputy
president Cyril Ramaphosa, and treasurer general Zweli Mkhize – backed down
from initial public objections that Zuma carried out his reshuffle without
proper consultation, reinforces the view that he is increasingly wielding his
Track record of transparent budgets
For the past
decade, Treasury’s Budget has been recognised globally for its complete
transparency and willingness to highlight the risks to its spending and revenue
targets. In its Budget for the coming year in February, it said that guarantees
on the debt of state-owned enterprises like Eskom remained a major risk to the
guarantees amounted to R477.7bn at the end of February while exposure totalled
R308.3bn. Eskom accounts for three-quarters of the guarantees and about
two-thirds of the exposure.
government bonds have climbed about 60 basis points since the Cabinet reshuffle
and are likely to rise more as Fitch’s downgrade of local currency means that
they will fall out of some bond indexes used by passive investors.
& Poor’s (S&P) only downgraded the country’s foreign debt, but has put
a negative outlook on local currency debt.
said on 7 April SA would depart from its investment grade government bond index
starting in late April, and noted that about $49bn worth of South African bonds
are benchmarked against its investment grade-only emerging-market bond indexes,
while $10bn is linked to its global bond index for emerging markets.
It will be
even worse if both S&P and Moody’s downgrade SA’s domestic debt to junk
status, as that means it will also fall out of Citigroup’s World Government
Downgrade impact contained so far
So far the
impact of the two downgrades on the rand and government bonds has been
relatively contained, partly because it was expected by markets and also
because global factors are benign – US interest rates are rising at a modest
pace and commodity prices have stabilised.
going forward will be net portfolio flows – which are foreign purchases of
domestic bonds and equities – and how the current account deficit would be
funded, said Colin Coleman, MD of Goldman Sachs International in South Africa.
that the choice of a replacement for Treasury director-general Lungisa Fuzile,
who resigned beginning of April, would be seen as an important indication of
whether fiscal discipline will be maintained. The appointment of one of the
current incumbents in Treasury would help to instil confidence.
“extremely concerned” about the long-term direction the country is taking and
would be watching closely to see whether “state capture” would spill over into
the private sector through regulatory and other pressures, he added.
first medium term budget policy statement in October will have to give some
indication of how government intends to fund its nuclear build programme and
will be closely scrutinised for signs that fiscal discipline is slipping.
are also waiting for more details on what the government means by “radical
economic transformation”, which is likely to be clarified at the ANC policy
conference in June.
Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial
correspondent for Reuters news agency after working in the Middle East, the UK
and Sweden, covering topics ranging from war to oil, as well as politics and
economics. She joined Business
Day as economics editor in 2007 and left
in 2014 to write on a wider range of subjects for several publications in SA
and in the UK.
This article originally appeared in the 20
April edition of finweek. Buy
and download the magazine here.