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Gordhan axing will drag down economic growth - research

Apr 21 2017 07:44
Lameez Omarjee

Johannesburg – The removal of Pravin Gordhan as finance minister has prompted fears of cronyism and corruption and is expected to drag down economic growth further, according to research.

BMI Research, part of the Fitch Group Company, released research which looked at the impact of President Jacob Zuma's Cabinet reshuffle on South Africa's economic outlook.

The reshuffle, which took place in March, saw the president replacing Gordhan with former home affairs minister Malusi Gigaba. Following Zuma's move, business and investor sentiment took a knock.

Gigaba is at the International Monetary Fund/World Bank Spring Meeting in the US, in an attempt to reassure investors and Moody’s that the country is not changing its policy direction.

In addition, populist rhetoric and less investor-friendly regulation such as the Mining Charter Amendment and the proposed Expropriation Bill could also impact investor confidence, said the research.

The appointment of Gigaba’s new adviser Professor Chris Malikane is one such an example. Malikane authored an opinion piece promoting nationalisation. Treasury subsequently distanced itself from the piece, and indicated that nationalisation is not government policy.

The research warned that failure to improve the business environment and state-owned enterprises may further drag down economic growth.

Currency outlook

BMI Research forecasts that the rand may rebound in the months ahead and will end the year at R13.25/$. However, risks to emerging market currencies and a downgrade of local debt may impact investor confidence.

The rand had strengthened to a near two-year low of R12.31/$ just before Gordhan was ordered to return to South Africa from an international investor roadshow in the UK on March 27, but these gains were lost on the recall and following the Cabinet reshuffle on March 31.

Political uncertainty is likely to result in further rand weakness, the research warned.

READ: Inflation reprieve unlikely to lead to rate cuts – economists

BMI also expects the repo rate to remain at 7%. The South African Reserve Bank (SARB) is “between a rock and a hard place”, said the report. “Despite sluggish growth and falling food prices, inflation will only gradually cool and the SARB will remain cognisant of the risk of further ZAR (rand) weakness.”

Recent data on the inflation rate for March 2017, which eased to 6.1% from 6.3% the previous month, indicates it was below market expectations. But the inflation rate is still uncomfortably high, Fin24 reported. Analysts believe a rate cut is unlikely to materialise later in 2017.

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