Team Pravin Gordhan just got stronger | Fin24
 
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Team Pravin Gordhan just got stronger

Mar 17 2016 07:53
Fadia Salie

Cape Town - We are seeing a coordinated fight back by team Pravin Gordhan against the tenderpreneurs, Nomura's emerging market economist Peter Attard Montalto told Fin24.

As such the market may well be getting ahead of itself with the rally we are now seeing, he said in reaction to Deputy Finance Minister Mcebisi Jonas' announcement that the Guptas did indeed offer him Nhlanhla Nene's job ahead of 9/12.

The rand rallied to trade at R15.66 to the greenback by 06:47 on Thursday from R16.24 shortly after Jonas dropped the long-awaited Gupta bomb around 17:30 on Wednesday.

READ: Rand trading must come with 'govt health warning'

"This is the most direct admission to date of an apparent ‘state capture’ of government by business interests outside of the formal political framework," said political analyst Daniel Silke.

In an opinion piece published on Fin24, Silke said the mystery and intrigue of the last few weeks reflect a further erosion of the power of President Jacob Zuma.

"Indeed, it seems now that he is losing control of his own party as an increasing number of senior members break the codes of silence and are prepared to own up to the somewhat sordid affairs of the state."

However, Montalto cautioned, the key is the ANC National Executive Committee where Zuma and the faction of tenderpreneurs hold a majority.

"The ‘top six’ within the ANC is splitting for Gordhan and the non-tenderpreneur faction, but the NEC we believe is still solidly behind the tenderpreneur faction and owe their positions and allegiance there," he said referring to an ANC NEC lekgotla taking place this weekend.

On the possibility that the Guptas may be deported to India, Montalto said recall may well be discussed, but it's not clear yet that a majority could be formed for it. "We may well end up with a whitewash outcome from the NEC."
 
Montalto said on Wednesday in his market insights on South Africa that he believes Zuma’s recall/managed exit will be discussed on the sidelines and state capture likely more openly, "but little is likely to come of these issues we think after the meeting given how the NEC splits".

READ: Behind the Gordhan/Hawks battle

This, he said, was seen most recently in the formal meeting between the ‘top six’ and the Gupta family "that seemed to have no positive outcome and where ‘pro-Gordhan’ forces were turned on".

"Ultimately Zuma is expendable (through a managed exit) by his own side to secure their aims, in our view – the market does not understand this and it ties into our point above – each camp is bigger than the named fronts the media attaches to them. We will see that dynamic play out at the lekgotla."

It took Jonas almost three weeks to come clean after the allegations first surfaced and comes as South Africa aims to reassure Moody's that it can pull its economy back from the brink of a recession.

Moody's Investor Service is currently in the country to assess to what extent South African government policies can stabilise the economy and restore fiscal strength in the face of heightened domestic and international market volatility. On March 8, the agency placed  South Africa’s Baa2 bond and issuer ratings on review for downgrade.

Asset manager Brett Birkenstock told Fin24 the government is playing a risky game of chicken, using the country's sovereign rating as collateral.

He said the volatility in the rand is currently partly being directed by political variables that could only increase as the elections draw nearer.

"One thing that is certain among all the uncertainty is the cost to the country that the politicising is causing.

"The other certainty one can draw from the market is that should Minister Gordon exit, junk status looms  as a conclusion."

"Yesterday's 65 cent move eclipsed the day before, where we saw a 50c move. We saw the high of 16.23 as offshore players continued to sell, but then a steady New York opening and a slightly higher move in the oil price saw it come off its high. As expected retail sales showed a move lower, but politics is causing the vicious moves in the ZAR," said Adam Phillips of Umkhulu Consulting in his daily report.

TreasuryOne added: "Federal Reserve officials held off from raising borrowing costs and scaled back forecasts for how high interest rates will rise this year, citing the potential impact from weaker global growth and financial-market turmoil on the US economy. This has caused emerging market currencies to retreat a bit as well as commodities to jump. Oil is back above $40. USDZAR is back at R15.66."

READ: Fed scales back rate-rise forecasts as global risks remain

Montalto said the situation remains highly complex. "It is worth laying out where we think things stand."

• Gordhan was reappointed under duress, reluctantly, by Zuma in December.

• Zuma and the tenderpreneurs require Gordhan to be compliant – to be ‘back in the box’, on issues ranging from nuclear tendering sign-off under the Public Finance Management Act, Eskom contracts investigations, South African Airwys and issues around wider procurement and tendering at national down to local government level.

• Gordhan is not complying, understanding that he must protect the integrity of both the institution of National Treasury, its staff (especially those involved in issues like nuclear) and the law. He is similarly attempting to keep fiscal policy in line and attempting to marshal sentiment in the private sector to boost growth and bring pressure on other areas of government to bring forward the microeconomic structural reforms that are needed to avert a downgrade. 

The nuclear option of a resignation remains open to him but is surely better saved for a situation where he has a weaker hand than this and a bigger battle. Overall, we think he will stay on for as long as possible.

• Allegedly captured state entities are now attempting to discredit Gordhan through a process of guilt by association with the South African Revenue Service case. They are also seeking public and private intimidation through the processes they are using as well as distraction from moving forward with issues like SAA board rejiggering.

• More and more pressure is being applied as Gordhan digs in. Gordhan is attempting to push the issue into the public eye, but both the media and the markets may get bored with the minutiae of the back and forth in the battle.

• It is important to recognise that Zuma is not the same as the tenderpreneur camp. He may well be one element of it and sympathetic to it, but it is bigger than just him. Hence we think there are different views – he would like to see Gordhan compliant in our view but finds it difficult to fire him, given the upset that would be caused in markets (this comes back to our narrative that Zuma does care about unemployment and growth - these concerns are just subsumed by other issues that are ranked higher like political balancing).

There are strong voices in the tenderpreneur camp however who do not care about market sell-offs or downgrades, who see downgrades as a positive opportunity for fire sale purchases of assets. These people are pushing for more and more pressure on Gordhan, while Zuma may be trying to keep the battle more subterranean.

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