Azar Jammine: Should Hawks succeed in removing Gordhan, mayhem will follow.

While some well intentioned politicians and even the occasional business leader believe Finance Minister Pravin Gordhan should resign over the criminal charges lodged against him, there was never any chance of that happening. For one thing, the allegations have the credibility of the central characters in a Sasha Baron Cohen comedy. For another, 67 year old Gordhan is a tough soldier, a hardened struggle veteran who retains his activist fervour. Like respected independent economist Azar Jammine, Gordhan is fully aware the consequences of his departure would be dire for the Rand, SA interest rates and the economy. He’s in for the long haul, believing his cause is just and truth will prevail. For rather obvious reasons, Gordhan has most ordinary South Africans on his side. – Alec Hogg

By Azar Jammine*

After a presentation we delivered on Friday attended by a well-respected TV journalist, we were contradicted with regard to the low probability assigned by us of Pravin Gordhan being removed from office as Finance Minister. Our view was that such a move would cause such chaos on domestic financial markets, that those trying to bring about such a situation ran the risk of reducing the value of their own wealth with such actions.

azar_jammine_gordhanHowever, we were assured that informed sources had informed the journalist that certain connected individuals were out to get rid of Gordhan as Finance Minister and to replace him with someone far more pliable and able to carry deals through National Treasury which would redound to the benefit of such individuals.

In the event, the journalist was right.

Yesterday we learned of the Hawks charging Gordhan with fraud. The basis for such allegations still does not appear to be particularly strong from the initial evidence given by the Hawks, supporting the view that Gordhan is innocent of such charges.

Nonetheless, the argument goes that it is difficult for the Minister of Finance to remain in his position whilst being asked to account for charges of whatever kind. From our interaction with the Minister of Finance, we do not believe that he will voluntarily resign his office.

On the contrary, we believe that he sees himself as a champion of the fight against corruption and “State Capture”.

However, events could be seen by some as a valid excuse for President Zuma to reshuffle Cabinet as a means of putting his own man in the position of Finance Minister.

Whether that meant that Gordhan was moved to another portfolio as happened six years ago, or was dropped from the Cabinet completely, is immaterial. His removal from the Ministry of Finance at this point in time, following show shortly after his appointment to the position under duress 10 months ago, would be seen by investors and ratings agencies as an attempt at “capturing” National Treasury in order to render the organisation more amenable to agreeing to certain deals involving state-owned enterprises (SOE’s) which would benefit the “capturors”.

Mayhem Would Follow Gordhan’s Removal

In the event of such a “worst case” scenario panning out, all hell could break loose on domestic financial markets, with dire ramifications for the economy.

A substantial increase in perceptions of “state capture” would make it almost certain that credit ratings agencies will downgrade South Africa’s credit rating. Furthermore, such a move would be seen in such serious light, that it could even see downgrades of more than one notch.

In such a situation, all three credit ratings agencies would be seen to be revising South Africa’s credit rating down to junk status and South African government bonds would be forced out of the international bond benchmark indices.

Large-scale capital outflows and sales of South African government bonds could ensue. Not only would this raise the cost of borrowing for the South African government, but it would also cause the Rand to plummet to new depths.

Far from ending a free fall at R16 or R17 to the Dollar, the currency could fall even further.

The spectre of inflation soaring would gain huge momentum and so too with the expectation of a sharp increase in interest rates. Such an increase in interest rates in turn would cause the South African economy to plunge into recession.

In such a recession, growth in government revenues would diminish markedly, making it still more difficult for the government to maintain a programme of fiscal deficit reduction as a means of capping the public debt.

In turn, again, failure to control a sharply rising trend in the public debt would lead to still more ratings downgrades. South Africa with the immersed in a vicious downward spiral of currency depreciation, sharply higher inflation and interest rates and collapsing economic growth.

Fortunately, Market’s Still Believe Gordhan Is Innocent

The question that might immediately be asked is why the Rand did not plunge by even more than the mere 3% depreciation which hit the currency in the wake of the Hawks announcement.

The answer probably lies in the fact that most analysts look upon these events with a sense of incredulity and confidence that Gordhan will hold the fort and be seen to have been innocent within a plot geared to oust him.

More magic available at
More magic available at

It is, however, not impossible to envisage the worst-case scenario being a real possibility, albeit unlikely.

It is interesting, nay almost reckless, to have brought such measures into place a mere fortnight before the Minister of Finance tables his Medium-Term Budget Policy Statement.

It is for this reason that one should not expect the Rand to regain earlier highs of a month ago any time soon in the midst of the uncertainty that is likely to prevail until the charge and execution of the charge, are complete.

All one is saying is that so long as there remains hope that Gordhan is indeed innocent and a victim of a conspiracy to get him out of office, the Rand need not lose too much further ground.

Nonetheless, these events are likely to have heightened the probability of at least some credit rating downgrade later this year and in this sense cannot be helpful for the currency in the short to medium term. The Rand has gained a lot of ground over the course of this year, but one fears has completed most of its gains.

Some Good Can Come Out Of This Move

On the positive front, one might contemplate a situation in which Gordhan is indeed found to be innocent.

This would prove to be a heavy blow against those eager to lay their hands on National Treasury and would certainly go some way towards preventing a wholesale downgrade of credit ratings. We fear, however, that some of the damage has already been done.

Read also: Zuma has pushed SA to edge of abyss. Too late to turn around?

Even so, looking at the bright side of things, this event could turn out to be a turning point in the struggle to maintain the relative independence and fiscal rectitude of National Treasury. If so, it could ultimately turn out to look like a blessing in disguise, even if the short to medium term implications are largely negative.

  • Dr Azar Jammine is the chief economist at Econometrix.
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