How world sees us: Gordhan going “would wreak complete chaos on SA markets”

Even though South Africans of an earlier vintage have been through it before, that doesn’t make it any easier to stomach. There are scary parallels with the actions of President Jacob Zuma and PW Botha’s Rubicon Speech in 1985 when he showed two fingers to the world, unleashing a capital exodus. That brought a quick end to Botha’s Regime, but also unnecessarily set back the economy for years, sowing needless poverty and hardship. The immutable fact is that South Africa is a developing country. It does not possess the financial resources which must be invested to reach its undeniable potential. It is also blessed with an open economy with over half the GDP dependent on imports or exports. Shutting itself off from the world, ignoring international opinion, is simply not an option. Numerous short-sighted politicians like PW Botha have tested the theory with disastrous consequences. Zuma is on the same track. By trying to paint Finance Minister Pravin Gordhan as a criminal, he risks repeating the blunder we got a taste of in Nenegate on 9 December. It beggars belief that Zuma set the Hawks onto his most respected cabinet member just as the latter returned from a punishing effort abroad marketing the country to investors. Those around Zuma should remember that in an international sense, South Africa is a pinprick, contributing less than half a percentage point of the world’s economic activity. Put differently, were it part of the USA, the country would rank just 16th on GDP by State, below Maryland and just above Minnesota. No matter how high the personal stakes for those involved, for the nation to allow anyone to play politics with the economy is more dangerous than we could ever imagine. And from all the evidence, this is precisely what is happening right now. Global markets sent a warning shot across South African bows yesterday, knocking the Rand 3% on news that the Hawks are playing hardball with Gordhan. Any escalation in the conflict could send the currency into a tailspin. That would create the potential for reactions few would want to contemplate. – Alec Hogg         

By Xola Potelwa, Amogelang Mbatha and Mike Cohen

(Bloomberg) — Investor fears are mounting that South African Finance Minister Pravin Gordhan’s job is in jeopardy as he engages in a public feud with police investigators over their probe into the national tax agency.

Gordhan’s departure could spell disaster for an economy threatened with recession and on the brink of having its credit rating downgraded to junk. President Jacob Zuma reappointed Gordhan in December as finance minister, a post he had held from 2009 to 2014, to help rebuild investor confidence damaged by Zuma’s decision to fire Nhlanhla Nene and replace him with a little-known lawmaker.

South African Finance Minister Pravin Gordhan reacts during a media briefing in Sandton near Johannesburg March 14, 2016. Picture taken March 14, 2016. REUTERS/Siphiwe Sibeko
South African Finance Minister Pravin Gordhan reacts during a media briefing in Sandton near Johannesburg March 14, 2016. REUTERS/Siphiwe Sibeko

“It’s a cause for concern,” Rune Hejrskov, who helps manage about $1.3 billion at Jyske Bank AS in Silkeborg, Denmark, said by phone. “Absolutely, we’re pricing South Africa with the possibility that Gordhan may not stay in his job.”

The Directorate for Priority Crime Investigation, a police unit known as the Hawks, on Tuesday said Gordhan, 66, missed two deadlines to answer questions relating to the tax agency that he led before 2009 and indicated it will force him to comply. Gordhan has described the Hawks’ statements as “threatening” and as harassment, while Zuma has said the probe should go ahead.

Read also: Sanco – Zupta v Gordhan is “not good for SA’s image”. Ditto 3% lower Rand.

The rand breached 16 to the dollar level for the first time since February after the Hawks statement, dropping 2.5 percent on Tuesday, while yields on the rand bonds due 2026 surged 28 basis points to 9.42 percent. The currency was 0.2 percent weaker at 15.9492 by 7:22 a.m. in Johannesburg on Wednesday.

Investor Roadshow

“What they are doing is to immediately undermine his credibility in the eyes of the international community by trying to make him out as a criminal,” George Herman, who manages the equivalent of $2.8 billion as head of South African investments at Citadel Investment Services, said by phone from Cape Town. “I don’t understand the agenda behind this. It is a ‘cut-your-nose- to-spite-your-face’ strategy.”

The public spat between Gordhan and the police comes a week after he met with investors during an international roadshow to the U.K. and U.S. to allay fears of a credit-rating downgrade. Standard & Poor’s has a negative outlook on its BBB- rating, one level above junk. Moody’s Investors Service, which rates South Africa’s debt one notch higher, put the nation on review last week for a cut.

Read also: Hawks desperation suggests Zupta dam is bursting. First Mentor, who’s next?

“The market is doubting how much support Gordhan has from his government,” Vivienne Taberer, a fund manager at Investec Asset Management in Cape Town, said by phone. “The price action is telling you that it’s not clear that he’s got the support. If he does leave, you’ll certainly see the rand a lot weaker than this.”

Weak Economy

For much of his three months in office Gordhan has sought to convince investors the government will stick to fiscal prudence by curbing spending and keeping debt under control. That pledge is made harder by a weakening economy that’s set to grow less than 1 percent this year.

Gordhan will probably retain his post because he has powerful backers within the ruling African National Congress, said Wayne McCurrie, a money-manager at Momentum Asset Management in Johannesburg.

“If Gordhan lost his job, it would be completely chaotic,” he said. “It would wreak complete chaos on the markets.”

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