If Pravin goes ...
SA could be tipped into a deep and lengthy recession should finance minister Pravin Gordhan be axed
If finance minister Pravin Gordhan is ousted to make way for a more pliable appointee it could precipitate a severe economic crisis and provoke an intense backlash from civil society.
The unanimous view of 10 leading economists polled by the Financial Mail is that, should Gordhan be replaced by a less credible candidate, the rand would weaken sharply, interest rate hikes would be firmly back on the table, a rapid downgrade to junk would be almost certain and SA’s nascent growth recovery would be wiped out.
“Confidence is already depressed and private investment has been contracting for some time,” says Old Mutual Investment chief economist Rian le Roux. “The prospect of a slumping rand, likely rate hikes, fiscal profligacy and a general sense that SA is firmly on the road to an economic crisis ... may well cause a renewed confidence dive.
“In short, it could trigger a full-blown crisis; but the credibility of the new minister will be the determining factor.”
The economy desperately needs certainty around the regulatory environment and macroeconomic frameworkNazmeera Moola
The survey consensus is that the rand would likely weaken by about R3/$, roughly mirroring the damage wrought by President Jacob Zuma’s sacking of former finance minister Nhlanhla Nene in December 2015. But there are several reasons why the market reaction could be worse this time round.
“Then, the market was short on rands and the real money was well hedged. That’s not the case now,” explains Nomura economist Peter Attard Montalto. He expects the rand to fall all the way to R18/$ if Gordhan does exit.
“We need to remember we are in a different world now,” he adds, “with [US Federal Reserve] hikes, a stronger US dollar and a steeper US yield curve ... The about-face shock from [a Gordhan exit] now would be brutal if it did happen.”
Not only is the external environment more tricky now, but a rerun of “Nenegate” would imply that government hasn’t learnt anything from that debacle or, worse, that it doesn’t care about the market reaction or the economic fallout that would result.
It would be seen as a disregard of creditors’ concerns and a “declaration of war on the financial markets”, says Pan-African Investment & Research CE Iraj Abedian.
Most economists surveyed agree that SA would almost certainly be downgraded to junk by S&P Global and/or Fitch at their next scheduled ratings reviews in June.
The agencies could strike before June if a new finance minister deviates decisively from current fiscal policy, says Argon Asset Management economist Thabi Leoka.
“We could see the currency weaken by R3 or more, not only because of the credibility of the person who replaces him, but [also because of] the reaction of ratings agencies,” she says.
Abrupt rand weakness and an inflation spike would be bad enough, but the real damage would come from the further collapse in confidence and investment that would accompany any move to destabilise national treasury.
“The economy desperately needs certainty around the regulatory environment and the macroeconomic framework,” says Investec Asset Management’s Nazmeera Moola. “The moment we have any sign of certainty the purchasing managers’ index goes above 50 and we see a pick-up in other economic indicators. But as soon as the political noise returns the data deteriorates very quickly.”
During 2015 and 2016, private fixed investment (PFI) contracted steadily. This is the first time since 1994 that SA has experienced a contraction in PFI (on a four-quarter rolling basis) outside of a global economic crisis.
“The economy really needs to be on its knees to see [PFI] contracting for a prolonged period, because there is always maintenance going on in any economy,” Moola explains.
What it means:
R16/$-R17/$ if Gordhan is axed, though Jonas is more likely to be cut
Since 1980, there have been five instances where PFI has contracted (see graph). Each case coincided with a global financial crisis (1998 and 2008), a collapse in commodity prices (1981/1982) or moments of extreme political uncertainty.
This was the case for instance in the aftermath of then president PW Botha’s infamous Rubicon speech in August 1985, when he failed to announce the start of a process to dismantle apartheid, and during SA’s transition to democracy in the early 1990s.
Since his appointment, Gordhan has survived intense ratings pressure and political harassment. When trumped-up fraud charges against him were dropped three months ago there was hope that the minister would be left alone to run treasury. Since the start of the year, however, the campaign against him has been ratcheted up.
Last week, Business Day reported that Zuma had accused treasury at the ANC’s recent lekgotla of frustrating the party’s economic transformation agenda.
Then, on Friday, Zuma’s son Edward launched a full-scale offensive at both Gordhan and his deputy, Mcebisi Jonas, accusing them of using the Public Investment Corp (PIC), which Jonas chairs, as “their base and playground for total control and capture of the country”. He went so far as to accuse Gordhan of plotting the demise of SA Airways in order to sell it off cheaply to a company in which a relative has interests.
But as Gordhan put it in court papers supporting his application in a case involving Gupta-owned Oakbay Resources last month, “the real plot is the systematic and highly organised campaign by the Gupta family and its associates against national treasury, myself and other targets”.
It is the first time that Gordhan has spelt things out so clearly.
If he is axed, and if it is perceived as a clear effort by the president to capture treasury, “it will be a very sad day for SA,” says Le Roux. “This is something society at large should strongly oppose.”
The Helen Suzman Foundation, which was instrumental in causing the national prosecuting authority’s case against Gordhan to fold, is looking at the possible legal steps it could take should the minister be axed.
“We are watching the space with great care,” says foundation director Francis Antonie. “If we find the president’s behaviour in any way irrational we would appeal to the courts to strike out any [such] decisions.”
However, the DA, which had former SABC chief operating officer Hlaudi Motsoeneng’s appointment overturned by the courts on the grounds of “irrationality”, has ruled out the possibility of mounting a similar legal challenge in Gordhan’s defence.
DA federal executive chairman James Selfe points out that cabinet appointments are regulated by section 91(2) of the constitution, which states that the president may appoint and dismiss ministers; but there is no requirement that this decision must be rational or that members of the cabinet must be fit and proper.
“In such circumstances, a legal challenge is not possible,” Selfe says. “However, we would mobilise South Africans against the irresponsibility of Zuma and his unfitness to hold office.”
A senior lawyer agrees that there is no legal basis for the courts to intervene. If SA operated under a stricter separation of powers doctrine, as in the US, where executive appointments are subject to the legislature’s approval, parliament would be duty bound to scrutinise any potential successor’s financial records and past behaviour, making it difficult for an insalubrious character to be appointed as finance minister.
Three of the 10 economists polled think Zuma will not risk the political furore that would be unleashed if he axed Gordhan. Rather, he is likely to choose the softer option of replacing Jonas with ANC MP Sfiso Buthelezi or former Eskom CEO Brian Molefe, giving them the reins at the PIC.
“Either scenario would be [a] financial-market negative, as both [Buthelezi and Molefe] would be seen as proxies for the patronage-driven network that continues to try to infiltrate key centres of government and state-owned enterprises,” says BNP Paribas Securities economist Jeff Schultz.
The market backlash in such a scenario would likely be significant, but not nearly as bad as if Gordhan himself were axed.