Something is stirring within the ANC

The market is significantly underestimating the conflict stirring within the ANC, writes Nomura economist Peter Attard Montalto...

December saw the balance of forces within the party upset by Nenegate and a shift in favour of the tenderpreneur faction. Pravin Gordhan’s (forced) appointment shifted it back into balance, but the tenderpreneur faction has not ‘lost’ and is now fighting back. South African assets should have more risk premia.

When Pravin Gordhan was re-appointed as Finance minister we commented, almost as an aside, that it is a difficult to quantify tail risk and that he would not last through until the 2019 elections. His own comments reported from the Budget briefings in the media have now been highlighted with comments such as “if I’m here in October” (at the MTBPS) and “let’s see if I’m still around” according to Fin24 and Business Day.

On Friday there were reports in Business Day and Mail&Guardian about the ongoing conflict between Gordhan and tax authority SARS Commissioner Tom Moyane. These stories report that Gordhan has threatened to resign if Moyane is not removed by President Jacob Zuma (unconfirmed). SARS is a state organ that is the responsibility of the National Treasury.

Moyane was appointed after Gordhan was moved from the National Treasury in 2014 and is seen as close to Zuma. The stories suggest that Zuma has refused to remove Moyane and Gordhan has (obviously) not resigned (yet).

But parts of the government or the ANC are clearly pushing back against Gordhan given a Hawks (special prosecutor’s office) investigation into the minister has now been launched about the so-called SARS ‘rogue unit’, which the minister is alleged to have set up when he was commissioner of SARS (unconfirmed) (Business Day).

This unit was alleged to have been designed to investigate political figures. The story will develop further in the coming days as, according to Fin24, the minister is expected to reveal details of the Hawks’ investigation into him – and so he will likely push back again.  

This background is complex, but is important and only is the beginning. The parts of the SONA and Budget speech we highlighted as the most interesting were about the greater oversight Gordhan seems to have now over parastatals. Yet here we think there will be key battles, just as with SARS – between Gordhan and the tenderpreneur faction of the ANC that fills the boards of state-owned companies and has Zuma’s backing.

We think the test is if Gordhan can ‘win’ and actually implement the reforms he is seeking. The question is does he have the political capital to take on these forces of ‘state capture’, as it is termed? The SARS case is just the first – the fact  Zuma has pushed back shows the challenge.

After the Budget we think there was too strong a view from business locally and the market that everything was fine – that the Budget speech said all the right things, was robust and forward on the challenges to be tackled showed  Gordhan was on top.

We do not believe the battle has been won outside of fiscal policy, including on these key issues of cadre deployment to parastatals.

However, we think this battle is much broader within the ANC. As we stated in our year ahead outlook, we believe the tenderpreneur faction of the ANC has a majority within the National Executive Committee of 100 ANC leaders. There is a misunderstanding that because Gordhan has been appointed this segment has been diminished and is no longer on top. That is not the case in our view.

We think the ANC is discussing issues such as a managed exit of Zuma. This is on the table mainly out of concern about how to preserve the status quo and secure ANC electoral support, not to shift to a stronger growth path or better policy (for the majority of the NEC at least).

In our view, investors need to think about how the NEC tenderpreneurship majority decides how to maintain access to power and that is the force that Gordhan is up against.

We think there is some support for the minister within the ANC and hence the statement on Friday from ANC Secretary General Mantashe that Gordhan had their “full confidence”. But Mantashe in our view is currently battling within the ANC to highlight the issue of ‘state capture’, the Gupta family and rent extraction, and his public statements on such issues (and on the president) have wavered as this battle has ebbed and flowed. We do not think it is possible to say that he has won or gained a majority behind him.

All this happens in the shadow of the ANC elective conference in December next year. Again, we think the key will be the tenderpreneur faction keeping the status quo and hence why we see Nkosazana Dlamini-Zuma being the front runner.

In summary, from the events of December until now the power dynamic within the ANC up to the president have shifted back and forth, but have not fundamentally been upset. The current status quo means Gordhan implementing changes at SARS and SAA remains very difficult and will be a continual and repeated touching of the ‘live wire’ that got Nene fired. Removing him is clearly more difficult now, but not impossible.

The president and the tenderpreneur faction may well call his bluff on any threats to resign – putting the blame on any market fallout on him. Gordhan winning each battle would be a large positive, but we should remember each step is just that, a battle as part of a larger war.

He has the capacity and resources of the National Treasury to back him up, but not a majority of support within the NEC, while the web of state capture runs deep (for example the clean out of several layers of management at SARS). We need to watch closely. The ratings agencies are watching, giving some benefit of the doubt for now. This is why we see December as more likely than June for an S&P move to sub-investment grade (commonly known as junk status).

We think markets are overlooking this issue and think it is a new world under Gordhan. We have often said we are only back to 8 December – after the downgrades before Nenegate. This way of looking at it is useful. The status quo has not yet been decisively shifted.

As a result, South African assets need more premia for the volatility and tail risk on the political front as this story develops.

* Peter Attard Montalto is the emerging market specialist at Nomura.