How world sees SA: Rand at fresh low, Gordhan “can’t do it all on his own”

When Jacob Zuma takes the stage tomorrow to deliver his first major speech of the year, South Africa’s president can expect to look out on a welcoming sea of black, gold and green – the colours of his African National Congress party.

The address at a stadium in Rustenburg, a platinum mining town, will mark the 104th anniversary of the founding of the ANC, the former liberation movement. An annual celebration, the event typically sees the president regale supporters with tales of the party’s history, while offering a first hint at new policies.

Much singing and dancing can be expected as the ANC puts on a choreographed display of strength and unity. Mr Zuma will lead from the front, belting out anthems that helped rally the ranks during its fight against apartheid.

Yet the joviality will do little to mask the malaise blighting the ANC, the government and the nation as Mr Zuma embarks on his eighth year in power. As emerging markets grapple with slowing growth, a fall in commodity prices and currency volatility, South Africa faces what some believe is its toughest economic period since it made the transition to democracy in 1994. Growth in gross domestic product is forecast to have been about 1.4 per cent in 2015, its lowest level since the 2009 recession. While business confidence is at its lowest since 1993, according to the South African Chamber of Commerce.

“I don’t think we have experienced circumstances over the past 21 years that are as arduous as the ones we currently face,” says Martin Kingston, chief executive of Rothschild inSouth Africa. “This is pretty much uncharted territory.”

Some of mineral-rich South Africa’s woes are attributed to the global situation but others are put down to domestic factors, with some deemed to have been self-induced. Africa’s most industrialised nation is still licking its wounds from the extraordinary events of last month which saw Mr Zuma chop and change his finance minister three times in five days: a damaging saga that triggered one of the worst crises of the democratic era.

The timing could not have been worse, with economists predicting greater gloom in 2016 amid fears of more job losses in the mining and manufacturing sectors, which contribute about 20 per cent of GDP. At the ballot box, the ANC is set to face its biggest challenge yet in municipal elections this year, as frustrations mount over high unemployment, poverty and yawning inequalities.

Graphic - recall Zuma

The result is a flurry of speculation about whether Mr Zuma, 73, will serve his full second and final term, which ends in 2019, amid growing political and economic uncertainty in one of the most traded emerging markets.

“It’s the most important year for governance for the ANC since 1994. It’s going to have an impact on the party and the nation, on Zuma and his legacy and whether he sees out his term or not,” says Lawson Naidoo, a former ANC activist who heads the Council for the Advancement of the South African Constitution. “How the ANC manages the low point it is at is going to be critical.”

Since taking office in 2009, Mr Zuma’s presidency has been dogged by scandals and complaints about patronage, corruption and policy uncertainty. Then on December 9 the president shocked South Africans and foreign investors with his decision to replace Nhlanhla Nene, his respected finance minister, with David van Rooyen, a little known backbencher. Many saw it as crossing a sacrosanct line.

Public debt swellsThe Treasury, along with the South African Reserve Bank, was seen as one of the most credible institutions – one believed to be immune from the meddling afflicting other state bodies. In one move, Mr Zuma put all that at risk, while reinforcing views among his detractors that under his stewardship, South Africa is slipping, slowly but surely, down a calamitous path.

Four days later, after billions of dollars had been wiped off the nation’s equity and bond markets and the rand had collapsed to all-time lows against major currencies, Mr Zuma performed a stunning reversal by appointing Pravin Gordhan, the highly- regarded former finance minister, back to the Treasury’s top post.

That came after a public outcry and backlash from business and, perhaps most importantly, from senior ANC figures, who watched aghast as their own savings plummeted. The appointment of Mr Gordhan initially steadied the markets but the rand has continued to weaken; yesterday it hit a new low against the dollar as it slumped by about 2 per cent to trade at below R16. The Johannesburg Stock Exchange also shed more than 2 per cent as South Africa was caught up in a sell-off of emerging market stocks.

Bonds fall behind rivalsMajor questions remain given the raft of controversies that have characterised the Zuma presidency. Citing concerns about infrastructure bottlenecks, a volatile labour market and regulatory uncertainty, Mr Kingston says South Africa needs to have a “predictable, reliable economic-policy framework within which it operates in the best of circumstances – and we are in troubling circumstances”.

“Pravin Gordhan is a highly competent, respected individual who theoretically should be capable of steering a ship in these times, but he can’t do it on his own,” he adds.

The ANC, which is riddled with factionalism, publicly rallied around its president after Mr Gordhan’s reappointment. The saga, however, left the impression of a president who had grossly miscalculated and acted with scant regard for both his cabinet and party. In an indication of the frustrations among senior ANC members, Trevor Manuel, the country’s longest-serving finance minister, wrote a scathing letter to a newspaper about the Nene dismissal, in which he alluded to speculation that the sacked minister may have been “demonstrating too much independence” for Mr Zuma to tolerate.

Gwede Mantashe, ANC secretary-general, says the fact that Mr Van Rooyen’s appointment was reversed shows the “ANC does listen and it responds”.

“A governing party commits mistakes and makes up for them. That is [its] responsibility,” he says. “Every year is tough, every election is tough, so we must just work hard.”

Yet the ANC government has much convincing to do if it is to reassure investors, businesses and wary South Africans that its financial management can be trusted.

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“There are still tests ahead. It’s only in the [February] budget that we will see the strength of the fiscal mandate provided to minister Gordhan and how much he is going to deliver,” says David Faulkner, economist at HSBC. “Until then there are going to be lingering questions over the credibility of fiscal policy and the management of public finances.”

HSBC is predicting a 1 per cent contraction in overall investment in 2016 and GDP growth of just 0.9 per cent.

SA mining output“It’s hard to see where the catalyst for stronger growth is going to come from, and the confidence issues, either business or consumer confidence, are going to persist longer than we initially thought,” says Mr Faulkner.

Ed Parker, a managing director at Fitch Ratings, which downgraded South Africa days before Mr Nene’s removal, believes Mr Gordhan is in a relatively strong position, at least for now. He adds, however, that his reappointment “doesn’t bring us back to where we were before the multiple changes of finance minister”.

“The subsequent reversal [by Mr Zuma] left a lot of questions about the motivation for the original change and, although the president was apparently forced into a U-turn, whether that motivation could resurface at some point,” Mr Parker says.

Mr Gordhan successfully faced an early test when he upheld Mr Nene’s earlier decision to block the attempt by the South African Airways board to rearrange an aircraft deal with Airbus.

At the time of the Nene dismissal there was speculation that his removal was related to the politically sensitive SAA decision. The lossmaking airliner is chaired by Dudu Myeni, whose ties to Mr Zuma caused the presidency to deny claims that the pair were romantically linked.

Yet the Treasury’s statement on SAA – blocking the purchase from Airbus – was only released late on the night of the December 21 deadline, hinting that there was pushback from the company’s board, and that the finance minister could face fresh battles as he seeks to reinforce fiscal discipline.

Mr Nene’s reticence to move forward with the president’s plans to build nuclear plants with 9,600MW of generating capacity was also cited as a factor in his exit. On the day he was dismissed, the cabinet backed the programme in spite of scepticism about the government’s ability to afford such a deal.

In an interview with the Financial Times after his appointment, Mr Gordhan pledged to keep a tight grip on state coffers and accelerate fiscal consolidation. On the nuclear issue, he said “nothing reckless is going to happen”.

Pravin Gordhan

It will, though, be an uphill task to balance the books and rein in wasteful spending. Rising public-sector wages account for about 40 per cent of the budget, and debt servicing costs are the fastest-growing element of expenditure. Revenue is dependent on a tax base of about 6m, while some 16m households in a country of 55m people receive social grants.

Recent credit rating downgrades have put South Africa perilously close to junk status, with bond yields widening markedly after Mr Nene’s dismissal, while lossmaking state-owned companies, like SAA, have become a burden.

Such is the low standing of Mr Zuma’s administration that many South Africans assume the worst, suspecting that state-related appointments or deals are often motivated by the aim of enriching the leadership, their cronies and patronage networks. Both the proposed nuclear deal and SAA’s attempt to rearrange the Airbus transaction intensified such concerns.

Much will depend on whether Mr Zuma has been significantly weakened by the Nene saga within the ANC and if senior party officials are emboldened to act as a check on some of his more controversial actions. In spite of its leftist roots, the politically dominant ANC has, since 1994, proven itself to be pragmatic and prudent in its fiscal management. Despite the country’s challenges, the strength of key institutions, as well as the judiciary, the media and civil society have been seen as important bulwarks against political mismanagement.

ANC falls at pollsThe country also stood out among emerging markets because of the soundness of its banks, capital markets and regulations. There has also been a mantra that the moderate “centre” of the ANC would always hold sway.

Those notions, though, were challenged by the Nene dismissal, while ANC factionalism is increasingly fuelled by competition for power and resources rather than ideology.

The race to succeed Mr Zuma is already under way with the ANC due to hold a five-yearly congress, at which it elects its leadership, next year. However, few ANC officials openly criticise the president and those who have been seen to challenge him tend to find themselves pushed to the periphery.

“In reality there is no one to challenge Zuma,” says Moeletsi Mbeki, a businessman and brother of Thabo Mbeki, the former president. “He may be weak in terms of credibility, but Zuma has never been strong in terms of credibility.”

He says the ANC’s real challenge is less about the president and more about the party’s “lack of economic performance and its incompetent and corrupt administration” as the post-apartheid dividend enjoyed by South Africa runs out of steam.

(c) 2016 The Financial Times Ltd.