All eyes on the treasury

For at least the next seven weeks, the South African economy is set to be plagued by heightened tension and uncertainty, with the focus firmly on the National Treasury ahead of the mini-budget speech and the latest round of credit rating reviews.

Adding to the economic anxiety was the news this week that the National Prosecuting Authority (NPA) had charged Finance Minister Pravin Gordhan with fraud related to R1.1 million paid to former SA Revenue Service official Ivan Pillay.

Gordhan responded to the charges by saying: “I intend to continue doing my job. The cause of defending ethical leadership in government and throughout society is too important to allow ourselves to be deterred by this kind of harassment.

“The fight against corruption, maladministration and waste of public resources will continue.”

However, he remains at risk of losing his job if President Jacob Zuma uses the NPA’s move as a pretext to reshuffle his Cabinet.

There is already a gap in Cabinet as Mzwandile Masina has moved from his post of deputy trade and industry minister to become mayor of Ekurhuleni.

If Gordhan were to be removed from his position as finance minister, investors would immediately size up the new appointment’s reputation, standing and what effect it would have on government and fiscal policy.

“All reasonable observers will expect the quality of financial management to deteriorate in a post-Gordhan scenario,” Alan Hirsch, University of Cape Town professor and director of the Graduate School of Development Policy and Practice, wrote in an opinion piece this week published by The Conversation website.

“They will expect that the reason for Gordhan’s removal is to loosen controls over the country’s National Treasury.

“The expectation of most will be that the budget deficit will rise, unaffordable projects will be supported for bad reasons, state-owned enterprises that are under incompetent management will get more bail outs, guarantees or capital injections, and government finances will quickly deteriorate. Ratings will fall, funds will leave South Africa and the rand will grow even weaker,” Hirsh wrote.

“Simply put: it will be a train smash.”

Isaac Matshego, a Nedbank economist, said there was a “lot of uncertainty and concern” among investors amid political developments.

Major business organisations and local trade union federations expressed their disquiet at Gordhan being charged.

The Black Business Council, the Chamber of Mines, the Johannesburg Chamber of Commerce and Industry and a grouping known as the CEO Initiative – which consists of CEOs especially from major financial sector companies – have expressed various concerns about Gordhan being charged.

Dennis George, general secretary of the Federation of Unions of SA, said he was “deeply concerned” about the timing of the formal summons.

Sizwe Pamla, Cosatu spokesperson, said: “This whole process has been badly managed by the Hawks and it has impacted negatively on our image as a country and, ultimately, our economy.”

Political analyst Justice Malala, according to Fin24, said the charges against Gordhan were indicative of the huge battle raging inside the ANC to gain access to state resources.

READ: Justice Malala: Huge battle in ANC to access state resources

“As long as this situation continues, all of us must prepare ourselves for events like what happened this week when Finance Minister Pravin Gordhan was summoned,” said Malala.

Gordhan will present his key mini-budget speech on October 26. A week later, on November 2, he is scheduled to appear in court to face the fraud charges.

Matshego said that key issues that investors would be looking out for is that the mini-budget would continue the theme of fiscal consolidation after a number of years of increasing state debt.

The mini-budget will be key to determining the stance taken by the international ratings agencies.

On November 25, Moody’s Investors Service is set to release its latest review of the South African government’s creditworthiness, followed by S&P Global Ratings. Fitch Ratings is likely to release its latest review at about the same time.

“It is important that South Africa avoid being downgraded to non-investment grade,” Matshego said.

The ratings agencies will be looking to see if government is reducing its budget deficit in line with the plans made during the budget speech.

The budget deficit would narrow from 3.2% in 2016/17 to 2.8% in 2017/18 and 2.4% the following year, Gordhan said in February.

S&P Global Ratings said this week that South Africa needed to stick to its fiscal targets set in the budget in February if it was to retain its investment-grade credit rating.

READ: S&P warns what's happening in SA more than just political noise

“What has changed in South Africa is that political tension and political turmoil have come to the fore,” Konrad Reuss, S&P’s managing director for sub-Saharan Africa, said at the Thomson Reuters Africa Conference in Cape Town this week, as quoted by Bloomberg.

“I’m tempted to say that it is a game changer compared with 10 years ago. We would be concerned if the current fiscal position is undermined. We
want to see the minister and his team stick to the fiscal targets,” Reuss said.

Matshego said that the issue of budget deficits could be a dealmaker when it comes to the upcoming credit rating reviews.

Azar Jammine, Econometrix’s chief economist, said that one of the things he was expecting the mini-budget to reveal were hints about what possible tax hikes could be unveiled in next year’s budget speech, amid a slow economy.

It was possible the mini-budget would have the National Treasury cut its growth forecast for this year, which stood at 0.9% in February, Matshego said.

Forecasts for growth this year range from a contraction of 0.2% to an expansion of 0.5%.

Matshego said he expected the mini-budget to reveal a growth forecast of between 0.2% and 0.5%.

The NPA’s announcement of its move to charge Gordhan caused the rand to fall as low as R14.36 to the dollar, the local currency’s weakest level since September 13.

On Monday, prior to the NPA’s announcement, the rand was trading at R13.80 to the dollar and analysts had started to forecast that the currency could break out of its long-term weakening trend.

This all sets South Africa up for a repeat of the crisis in December, when Zuma suddenly fired Gordhan’s predecessor, Nhlanhla Nene, which caused the rand to crash to record lows and caused JSE stocks to lose tens of billions of rand in value.

This week, JSE banking stocks again lost many billions in value after the news of the Hawks’ charge broke.

“A much weaker currency will add to inflationary pressures, and could force us to revaluate our view that the SA Reserve Bank’s tightening cycle has come to a close,” Capital Economics Africa economist John Ashbourne wrote in a note.

All these events come amid a stagnant economy and mounting unemployment. At the same time, business confidence is at its lowest since 1985.

At the same time, the performance of the country’s state-owned enterprises, especially SAA and Eskom, had been under the spotlight.

The mini-budget was unlikely to contain anything new about state-owned enterprises, Matshego said.

“I expect a very slow process of restructuring state-owned enterprises.”