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Gordhan plot all about power, SOEs and tenderpreneurs - economist

Aug 25 2016 06:49

Cape Town - The market reaction will be profound should President Jacob Zuma decide to push the reshuffle button, which could see Finance Minister Pravin Gordhan exit the National Treasury.

This is according to Nomura emerging markets economist Peter Attard Montalto on the latest attack on Gordhan by the Hawks.

Gordhan was summoned on Tuesday by the elite Hawks police division to report on Thursday afternoon over allegations relating to an investigation unit at Sars.

Gordhan has been accused among other things of acting corruptly by granting early retirement to the former deputy head of Sars, Ivan Pillay.

Pillay, group executive Johann van Loggerenberg and initial head of the investigative unit, Andries van Rensburg were also reportedly asked to report to the Hawks.

Montalto said the market erroneously priced out political risk premia to zero in recent months, when in reality it should have remained as high as at the start of the year.

“This is going to be a relatively rapidly moving story, in our view – there is political urgency now to the need for change at National Treasury, but Pravin Gordhan will not go without a fight and dig in,” he said.

Need for speed

He listed several state-owned companies as reasons for a need for speed from Zuma’s perspective and why he thinks the Gordhan saga will move rapidly: to an arrest and charges and then ultimately on to a reshuffle:

* SAA is an urgent issue where guarantees are needed. The deadlines are a little fuzzy, but accounts for last year are due in parliament by 15 September and require guarantees for that to happen. This date has moved in the past, but parliament is now pushing back against further delays. Hong Kong requires accounts (showing solvency) by 6 September or else it would ground any plans there. The South African Air Services Licensing Council requires accounts and proof of solvency by early October or else it would ground SAA planes. Leasing companies could also seize assets if this were to happen. This is the most pressing issue.

* Zuma’s faction, we believe, wants an end to Treasury’s investigations of Prasa, Eskom contracts, and similar issues ongoing or about to start. They also want Treasury to stop blocking a number of tenders and contracts that are seen as politically necessary.

* Nuclear is also seen as being stalled on by Treasury, and Montalto believes Zuma’s faction wants movement here to hard tendering by year-end.

The market received a sharp wake-up call with news that Gordhan had been summoned to receive draft charges on Thursday around the issue of the so-called spy unit when he was Sars Commissioner.

HOW THE STORY UNFOLDED:

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“This was a rude awakening for a market with zero political risk premia. The ‘war’ suddenly was alive again,” said Montalto.

He said before the local elections campaign got under way, there was a rough stalemate in the ‘war’ between Gordhan and Zuma, which was then buried for the election campaign. In this time - from May to the start of August and especially after the elections - the market wrongly priced out political risk premia to zero.

“The market does not understand the political dynamic within the ANC, and especially relating to Zuma’s position and his power. This has left us with a situation where the market is in dire need of risk premia – the same amount we had in Q1 even, but there is still a long way to get there.”

Rand rout

In the past two days, the rand was a tragic victim of the continued unfolding of the drama between Gordhan and the Hawks.

By late afternoon on Wednesday the rand was down 4.91% at R14.24/$, but it pulled back to close at R14.17 after Gordhan hit back, saying he had been advised that he is under no legal obligation to do this and will, therefore, not meet the Hawks.

He emphasised that he was not a suspect in the Hawks' investigation into certain Sars issues.

The local currency was also significantly weaker at R16.02 (-4.23%) and R18.84 (-5.63%) against the euro and pound respectively.

Gordhan insisted to the Hawks: “I have a job to do in a difficult economic environment and serve South Africa as best I can. Let me do my job.”


Montalto, however, said the ‘war’ is not over and in particular, Zuma has not lost power – neither after Nenegate nor after his Constitutional Court case on Nkandla nor after the local elections.

“Zuma is the master of playing the ANC, and especially the NEC at its own games, holding it in equilibrium exactly where he wants it. We still believe he has the support of at least 60% of the NEC, which, in turn, backs him in what is going on now,” Montalto said.

Control of Treasury

He said it is ultimately all about winning the ANC elective conference – currently scheduled for December 2017, though possibly earlier – which now adds a sense of urgency.

In turn, winning the elective conference is about then charting a path under a new leader, but that represents the status quo for the tenderpreneur faction, through to the ANC winning in 2019.

“The route to that is a well-oiled patronage machine, which requires, ultimately, control over National Treasury,” he explained.

Montalto noted that control does not necessarily mean that Gordhan has to be gone per se. There are other methods of ‘boxing in’ that have been raised, such as a cabinet oversight panel that would oversee and ‘instruct’ Treasury on issues, like the new SOE Presidential oversight panel announced on Monday, he said.

Montalto believes Gordhan will fight for as long as possible to remain in position and to protect the law, the Treasury, and its staff. This has been shown by his refusal to attend the Hawks meeting. “He is protesting his innocence in the strongest possible terms, but also putting the ball firmly in Zuma’s court to fire him.

“However, the amount of pressure he is under from this charge issue (on the Sars spy unit) and on new investigations being launched into tenders and contracting while he was Sars Commissioner are mounting.”

READ: 12 ways Gordhan reacted to the relentless Hawks onslaught

Montalto said he believes that Gordhan’s exit is a ‘live’ issue, though putting a precise timeline on this or calling the end point is exceptionally difficult.

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