JOHANNESBURG — Time is a precious resource, and it’s one South Africa, and the new Finance Minister Malusi Gigaba don’t have much of. Since the late night cabinet shuffle in March, his tenure has been clouded with controversy, most notable as one of the Gupta henchmen. The #GuptaLeaks also showed how he fast-tracked the family from India’s South African residency, although Gigaba sees nothing wrong with it. And the depth of ‘capture’ doesn’t stop there, his second in charge Sfiso Buthelezi is also implicated, given the inflated cost at which he bought trains while at PRASA. In yet another detailed analysis from well known economist Azar Jammine, he says all the country, and the rating agencies, crave is some credibility at Treasury. But finding it given the history is increasingly difficult, and this despite Gigaba’s best efforts. It’s his Sisyphean task, every time he finds himself getting the ball close to the top of the hill, someone comes along and hits it back at him, the most recent case being Mines and Mineral Resources minister Mosebenzi Zwane and his new charter. – Stuart Lowman
By Azar Jammine*
Gigaba and the country crave enhanced credibility of Treasury
Malusi Gigaba bemoaned the myriad of analysts doubting his credentials in his new position and in particular, casting aspersions on his vulnerability to state capture by the Zuma/Gupta factions. He went out of his way to defend his erstwhile actions as Minister of Home Affairs in granting permanent residence to members of the Gupta family, bypassing normal vetting procedures. He also defended himself against claims that his father was not South African.
Similarly, his Deputy, Sfiso Buthelezi stands accused of agreeing to purchases of train coaches at inflated prices, providing kickbacks to intermediaries, whilst Chairman of the Passenger Rail Association of South Africa. Concerns relating to the new leadership of the National Treasury extend to the core of credit ratings decisions to downgrade the country’s credit ratings. Although the appointment of the new Director-General Dondo has been generally met with approval, there remain significant concerns about whether or not the change in leadership at National Treasury has been deliberately brought about to enable more easily those with ties close to President Zuma and the Gupta family to engineer deals with that might benefit them.
Ratings agencies are concerned that the decline in governance at SOEs will compel government to have to bail them out with its own loans, resulting in further substantial increases in public debt to levels which impair the government’s solvency further. Why this is of great concern is that further credit ratings downgrades by the S&P and Moody’s would take South Africa’s credit rating on its local currency debt by these ratings agencies down to junk level.
This would compel South African government bonds to be dropped from the World Government Bond Index (WGBI). Such a move could precipitate large-scale sales of South African government bonds, leading to severe currency depreciation, increased inflation and the risk of higher interest rates and still lower economic growth.
Gigaba’s three principal objectives are noble
In order to appease business interests relating to the fear of state capture, Gigaba has been trying to resuscitate the initiative undertaken successfully by his predecessor Pravin Gordhan in developing a roundtable approach to addressing structural weaknesses in the economy with the involvement of a group of CEOs, labour union leaders and members of government. The so-called “CEO Initiative” inspired by Gordhan to ward off credit ratings downgrades was virtually killed off by the Cabinet reshuffle announced by President Zuma on 31 March, which in turn was followed three days later by credit ratings downgrades by S&P Global and Fitch.
Gigaba appears to be determined to rebuild trust between the government and private sector business leaders notwithstanding their questioning his credibility and vulnerability to state capture. To this end, Gigaba has made it clear that he intends to address the three key ingredients to preventing further credit ratings downgrades and re-establishing trust.
Firstly, he would like to renew the initiatives aimed at addressing structural impediments to economic growth with business. Gigaba has recognised that higher economic growth is an imperative without which government revenues are likely to undershoot in such a way as to impair the state’s ability to reduce its budget deficits and constrain the rising trend of public debt.
Secondly, he would like to increase economic policy certainty as the growing uncertainty about government’s intentions on a wide variety of issues has been cited as a huge impediment to capital investment and trust between private and public sectors.
Thirdly, Gigaba has pledged to improve governance at SOEs and others state organisations in order to allay fears that such organisations will need to be bailed out by the government, leading to further increases in public debt. All these objectives can only be applauded and go to the heart of appeasing credit ratings agencies and preventing a worst-case scenario of further downgrades which would lead to comprehensive junk status and a potential for massive sales of government bonds by foreigners.
Unfortunately, Gigaba’s intentions will only be believed over time
Unfortunately, as much as one might superficially be encouraged by the determination of the new Minister of Finance to address questions of trust and credibility, it will be only over a long period of time that confidence can be restored in the stability of National Treasury and its distance from issues of state capture.
First and foremost, questions are likely to persist as to why President Zuma undertook the Cabinet reshuffle in March were it not for the fact that he wanted to put new ministers into positions where he could dictate more easily the kinds of decisions they would make. In particular, the changeover at the head of the Finance Ministry, which was seen as a deliberate attempt at removing Gordhan and his deputy Jonas who were seen as impediments to allowing many deals involving SOEs to go ahead, appeared to be aimed at benefiting Zuma’s patronage.
Judging from the series of e-mails surrounding the relations between connected persons and the notorious Gupta family, both Gigaba and Buthelezi appear to be implicated in terms of their relations with the Gupta family. Gigaba has denied this, arguing that he frequently acted against the Gupta interests and that many of the deals he agreed to were executed simply in order not to exact the wrath of the President.
Be that as it may, it is likely to take many actions and a track record of sufficient time proving himself to be sufficiently independent of Zuma and his patronage, for credibility to be restored. Even the passage of the Medium-Term Budget Policy Statement in October will still not allay such fears. The budgeting process takes place over many months and will have already begun long before Gigaba’s appointment as Minister of Finance.
The second huge message casting doubt on Gigaba’s ability to see through his objectives occurred virtually simultaneously, with Gigaba’s own pleas to be given room to prove his abilities. Minister of Mineral Resources Mosebenzi Zwane unilaterally announced a new Mining Charter which raised the ire of the mining sector and the business sector as a whole. It is almost a deliberate attempt at scuppering attempts at rebuilding trust between private and public sectors and restoring economic policy certainty.
Mining companies are essentially being required to build up their Black shareholdings from 26% to 30% within 12 months. They are also required to allocate 1% of revenues to additional dividends to black shareholders.
In addition, the requirements in terms of proportion of Blacks needed to be in different tiers of management are seen to be out of line with the skills and qualifications available within the Black personnel employed in the mining sector to achieve such ends.
Finally, there appear to be extreme constraints on obtaining new mining licences. The whole issue is being taken to Court by the Chamber of Mines. This is hardly a recipe for restoration of confidence by international and local investors in the new dispensation supposedly ushered in under the oversight of Finance Minister Gigaba.
Key issue will be ANC presidential elections
In many ways, from the word go, Gigaba was placed in a lose-lose situation. As much as he might try and succeed in establishing an image of competence as Minister of Finance and re-establishing his personal credentials, he could well be overtaken by events. Should there be a change of leadership in the ANC at its December presidential election in the direction of those factions opposed to Zuma’s patronage, this could well be followed by the new ANC president being moved in to take over as president of the country well in advance of the 2019 general elections, precisely to ensure increased chances of success for the party that such elections. Gigaba and Buthelezi might well find themselves out of favour with a new leadership of the party. Although many might see this as increasing the element of uncertainty, such developments could well see a revitalisation of investment appetite in the South African economy and may serve to be the catalyst for a turnaround in the declining fortunes of the South African economy.
Uncertainty remains over Credit Rating outlook
The next formal reviews of ratings agencies are due to take place on 24th November, but this is prior to the December ANC presidential elections, even if they occur after the tabling of the Medium-Term Budget Policy Statement in October. It is likely that there will still be considerable uncertainty surrounding the future course of economic governance in the country and the associated economic policies of the government. The ratings agencies in November might therefore still be willing to give the country the benefit of the doubt to assess the implications of the manner in which affairs pan out after the elections. Nonetheless, one is compelled to conclude that Gigaba’s protestations against unfair assessments of his credentials and abilities are unlikely to sway ratings agencies away from perceiving a substantial probability of needing to downgrade the country’s credit rating further, albeit during the course of 2018. Under the circumstances, we find it difficult to favour a view which sees continuing strength in the exchange rate of the Rand. Unfortunately, what makes this assessment more complicated is the fact that international economic developments appear to be more important than domestic political ones at present in determining the movements of the exchange rate. However, we continue to see the downside in the currency as being greater than the upside even in terms of the potential impact of a tightening of global monetary policy and the potential this might have in reversing the current favourable sentiment towards emerging markets. This approach is aligned to consensus views.
- Azar Jammine is the chief economist at Econometrix.
