To South Africa’s bat­tered econ­omy, add a scan­dal that’s shred­ding the ANC

South Africa’s pres­i­dent is un­der pres­sure for al­leged graft “This is the most dif­fi­cult sit­u­a­tion ... in the last 20 years”

Bloomberg Businessweek (Asia) - - CONTENTS - −Franz Wild

As if his coun­try’s 25 per­cent un­em­ploy­ment rate, stag­nant econ­omy, and de­te­ri­o­rat­ing credit rat­ing weren’t bad enough, South African Pres­i­dent Ja­cob Zuma faces a political graft scan­dal that threat­ens to wreck the party of Nelson Man­dela. With more than 60 per­cent of the vote in ev­ery par­lia­men­tary elec­tion since 1994, the African Na­tional Congress re­mains the top political power in South Africa. Yet in­ter­nal divi­sions are pit­ting the forces of fis­cal dis­ci­pline, rep­re­sented by Fi­nance Min­is­ter Pravin Gord­han, against the pro-Zuma camp, which has less re­gard for in­vestors and fi­nan­cial mar­kets.

Over the past few years, Zuma has drawn fire over the slow pace of govern­ment re­form and a mount­ing num­ber of scan­dals and mis­steps, in­clud­ing the ap­point­ment of an in­ex­pe­ri­enced

fi­nance min­is­ter that led to a sud­den 10 per­cent de­cline in the rand, the coun­try’s cur­rency. The ten­sion peaked on March 16, when Deputy Fi­nance Min­is­ter Mce­bisi Jonas claimed that three brothers who are Zuma’s per­sonal friends had of­fered him a pro­mo­tion to fi­nance min­is­ter. The Gupta brothers, who have built min­ing, en­gi­neer­ing, and me­dia busi­nesses since ar­riv­ing from In­dia in the 1990s, de­nied the al­le­ga­tion. They’ve been con­nected with Zuma since 2000, and Zuma’s son Duduzane is a share­holder in sev­eral of their busi­nesses. Zuma re­cently thanked the Gup­tas for work­ing with his son but said there was noth­ing un­to­ward about their re­la­tion­ship and that he alone ap­points the coun­try’s min­is­ters.

Some se­nior ANC of­fi­cials say they’ve had enough of the litany of scan­dals tar­nish­ing the party’s name. ANC Sec­re­tary Gen­eral Gwede Man­tashe, who mas­ter­minded Zuma’s party elec­tion vic­to­ries in 2007 and 2012, re­cently warned that South Africa was at risk of be­com­ing a “mafia state.”

“This is the most dif­fi­cult sit­u­a­tion we’ve had to man­age in the last 20 years,” says Ab­dul Wa­heed Pa­tel, a Cape Town-based political an­a­lyst with Ethicore, a political ad­vi­sory ser­vice. “Given the political sit­u­a­tion and the bal­ance of forces in the ANC, I don’t see any res­o­lu­tion of this in the short term.”

The political strife comes as South Africa faces its worst eco­nomic cri­sis since apartheid ended in 1994. In De­cem­ber, Stan­dard & Poor’s cut its out­look on the coun­try’s credit rat­ing to neg­a­tive. The next step is junk, which would raise South Africa’s al­ready high bor­row­ing costs and worsen the blow that low com­mod­ity prices have dealt to Africa’s most in­dus­tri­al­ized coun­try. Last month, the World Bank said that South Africa’s econ­omy is “flirt­ing with stag­na­tion, if not re­ces­sion.”

Un­der the lat­est bud­get, pre­sented by Gord­han in Fe­bru­ary, govern­ment debt will rise to more than half of gross do­mes­tic prod­uct this year, nearly dou­ble the ra­tio when Zuma took of­fice in 2009. A much-vaunted plan to boost growth by cut­ting regulation and rais­ing in­fra­struc­ture spend­ing has had lit­tle im­pact since it was con­ceived in 2011. Eco­nomic growth has not ex­ceeded 1.5 per­cent for the past two years.

The govern­ment has even had trou­ble keep­ing the lights on: The coun­try had daily power out­ages in the first half of 2015 as the state power util­ity, Eskom, strug­gled to fund re­pairs. Things have im­proved since then, with no out­ages for the past six months, but that has more to do with a lack of de­mand than any­thing else. “The is­sue isn’t that Eskom has mag­i­cally turned around,” says Shaun Nel, a spokesman for South Africa’s En­ergy In­ten­sive Users Group, which rep­re­sents the coun­try’s largest power con­sumers. “The is­sue is that de­mand has fun­da­men­tally col­lapsed.” Power gen­er­ated by Eskom’s plants last year fell to the low­est level since 2006. Eskom says that de­mand has dropped but not dras­ti­cally.

Since win­ning re­elec­tion as party leader in 2012, Zuma has strength­ened his hold on power with the help of a loy­al­ist ex­ec­u­tive com­mit­tee and by bring­ing the state se­cu­rity ap­pa­ra­tus more closely un­der his watch. A twoterm limit as pres­i­dent means he can serve only un­til 2019. A third term as ANC party leader would be pos­si­ble

at the end of next year, but the past three months have left him con­sid­er­ably weak­ened.

Zuma has proven to be a sur­vivor. Dur­ing the strug­gle against apartheid, he was the ANC’s in­tel­li­gence head and spent a decade im­pris­oned on Robben Is­land with Man­dela. He has since weath­ered cor­rup­tion charges and was ac­quit­ted in a rape trial. This is the most pres­sure he’s been un­der in his nine years as party leader and his seven years as the na­tion’s pres­i­dent.

Tough months lie ahead. The ANC may lose con­trol of a cou­ple of cities in lo­cal elec­tions. South Africa’s high­est court is rul­ing on whether Zuma vi­o­lated the con­sti­tu­tion by ig­nor­ing di­rec­tions from an anti-graft om­buds­man to pay back state funds put to­ward an upgrade to his home. A credit-rat­ing down­grade could come as early as June.

The bot­tom line A political scan­dal in South Africa is adding to the coun­try’s eco­nomic prob­lems, as low com­mod­ity prices hit the min­ing in­dus­try.

South African Pres­i­dent Zuma’s ap­proval rat­ing is sink­ing amid scan­dal and a sag­ging econ­omy

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