THE ROAD TO RUIN

Ac­cord­ing to in­vestors, Pres­i­dent Zuma’s shock­ing Cabi­net reshuf­fle doesn’t bode well for SA’s econ­omy

CityPress - - Business And Tenders - JUSTIN BROWN and LESETJA MALOPE busi­ness@city­press.co.za

I nter­na­tional in­vestors see Pres­i­dent Ja­cob Zuma’s Cabi­net reshuf­fle as a change in pol­icy direc­tion that will ul­ti­mately leave the coun­try’s fi­nances in a big mess.

Fitch Rat­ings said that this move would see “rad­i­cal so­cioe­co­nomic trans­for­ma­tion” get­ting pri­or­ity over fis­cal dis­ci­pline and the moves to im­prove trans­parency and gov­er­nance of state-owned en­ter­prises (SOEs) would be halted.

“SOEs’ li­a­bil­i­ties, and there­fore con­tin­gent li­a­bil­i­ties to govern­ment, will prob­a­bly grow more rapidly, par­tic­u­larly if a plan to post­pone the com­mis­sion­ing of new nu­clear power sta­tions to 2037 is re­versed,” Fitch said.

“The po­lit­i­cal back­drop in­creases the risk that govern­ment will re­sort to costly ex­pen­di­ture mea­sures or leg­is­la­tion that will weaken eco­nomic growth to sta­bilise its sup­port.

“These de­vel­op­ments, to­gether with rel­e­vant pol­icy an­nounce­ments from the new Cabi­net, could re­sult in Fitch re­view­ing its rat­ings on the South Africa sov­er­eign,” Fitch said.

Fitch and S&P Global Rat­ings both have South Africa rated on the last notch of in­vest­ment grade, while Moody’s In­vestor Ser­vices has the coun­try two notches above “junk” sta­tus.

Zuzana Brix­iova, a Moody’s an­a­lyst and lead sov­er­eign an­a­lyst for South Africa, said: “Fis­cal and eco­nomic poli­cies are an im­por­tant fac­tor in our assess­ment of a coun­try’s credit pro­file; we will closely mon­i­tor any po­ten­tial pol­icy im­pli­ca­tions of this re­cent de­vel­op­ment.”

Lo­cal con­sumers are go­ing to bear the cost of the clumsy way in which Zuma han­dled his Cabi­net reshuf­fle this week.

The rand was the big­gest ca­su­alty, los­ing as much as R1.31 to the dol­lar from R12.31 for a green­back early on Mon­day as in­vestors wor­ried about what would hap­pen at Na­tional Trea­sury.

The weaker rand will in­crease the cost of im­ported goods such as petrol, boost con­sumer in­fla­tion – which is a key mea­sure used in set­ting in­ter­est rates – and place con­sumer spend­ing un­der pres­sure, but will be wel­comed by lo­cal ex­porters, such as the min­ing in­dus­try.

Un­cer­tainty re­lated to the changes at Trea­sury means that the coun­try’s in­vest­ment grade rat­ing – key to the lo­cal level of bor­row­ing costs – as well as busi­ness and con­sumer con­fi­dence, both vi­tal for eco­nomic growth, are again go­ing to be un­der pres­sure.

The lat­est move re­sem­bled Zuma’s fir­ing of Nh­lanhla Nene as fi­nance min­is­ter in De­cem­ber 2015, which caught ev­ery­one off guard and caused the rand to fall to its weak­est level in his­tory. JSE stocks – es­pe­cially banks and fi­nan­cial ser­vices com­pa­nies – lost tens of bil­lions in mar­ket value.

How­ever, this time there had been spec­u­la­tion for months that Zuma would drop Fi­nance Min­is­ter Pravin Gord­han from his Cabi­net ow­ing to on­go­ing ten­sion be­tween the two.

Gord­han has clashed with Zuma al­lies, in­clud­ing SA Rev­enue Ser­vice (Sars) com­mis­sioner Tom Moy­ane and SAA chair­per­son Dudu Myeni.

How­ever, on Fri­day, Sars spokesper­son Sandile Memela de­clined to com­ment on the changes at Trea­sury, say­ing the or­gan­i­sa­tion was not con­cerned with po­lit­i­cal de­vel­op­ments.

Zuma and Gord­han have dif­fered over “rad­i­cal eco­nomic trans­for­ma­tion”, with Zuma tak­ing a view aimed at rec­ti­fy­ing the skewed racial own­er­ship of wealth in the coun­try, while Gord­han’s view was more in­vestor-friendly.

On Mon­day, spec­u­la­tion about the fu­ture of the fi­nance min­istry reached fever pitch when Zuma or­dered Gord­han and his Trea­sury team to re­turn home from an in­ter­na­tional road show in the UK and the US.

Early on Fri­day morn­ing, Zuma an­nounced that Malusi Gi­gaba would be the new fi­nance min­is­ter and Si­fiso Buthelezi would re­place Mce­bisi Jonas as deputy fi­nance min­is­ter.

Gi­gaba on Fri­day held talks with Gord­han, Na­tional Trea­sury di­rec­tor-gen­eral Lungisa Fuzile and mem­bers of the Trea­sury ex­ec­u­tive com­mit­tee.

Ned­bank chief econ­o­mist Den­nis Dykes said the Cabi­net reshuf­fle was a dis­as­ter and that Gord­han and Nene be­fore him had done a good job.

“Gi­gaba doesn’t have that port­fo­lio on his CV, so I think it’s def­i­nitely go­ing to be a learn­ing curve for him,” he said, adding that Trea­sury at least had com­pe­tent staff to sup­port him and that the worst thing would be if key staff mem­bers were to leave.

Dykes said although Gi­gaba has had nu­mer­ous other port­fo­lios, han­dling fi­nances might be like ask­ing a mo­tor ve­hi­cle driver to fly a plane.

“The con­cern of the mar­kets is to en­sure money is spent prop­erly,” he said.

Ge­orge Gly­nos, ETM man­ag­ing di­rec­tor, said that the reshuf­fle was clearly based on a po­lit­i­cal vendetta and that Gi­gaba’s lack of ex­pe­ri­ence in the sen­si­tive port­fo­lio was a huge con­cern.

He pointed out that the coun­try could no longer avoid a credit rat­ing down­grade.

The un­cer­tainty around Gord­han’s exit caused the JSE to lose ground on Fri­day, but the big­gest losses were in bank­ing and fi­nan­cial stocks.

The JSE Fini In­dex, which in­cludes the top 15 fi­nan­cial stocks, lost 6% for the week, while the banks in­dex lost 10% and the fi­nan­cial in­dex dropped 5%.

The 10-year govern­ment bond weak­ened to 9.04% – its most ex­pen­sive level since Fe­bru­ary 2016 – be­fore be­ing quoted at 8.83% on Fri­day af­ter­noon.

On Fri­day, Gord­han blamed the reshuf­fle for the fail­ure of a rou­tine auc­tion of short-term bonds that same morn­ing.

There were R600 mil­lion worth of bonds on of­fer, but bids for only R200 mil­lion were re­ceived, he said.

There was sup­port for Zuma’s move from some quar­ters, but the de­ci­sion to drop Gord­han was largely met with crit­i­cism and un­hap­pi­ness.

Deputy pres­i­dent Cyril Ramaphosa told eNCA that he didn’t agree with Zuma’s rea­son­ing, which was based on a du­bi­ous “in­tel­li­gence re­port”, for re­mov­ing Gord­han.

Ramaphosa said Gord­han was serv­ing with “ab­so­lute dis­tinc­tion” and his re­moval was “un­ac­cept­able”.

How­ever, Ramaphosa, who is look­ing to re­place Zuma as ANC pres­i­dent in De­cem­ber, said he wouldn’t re­sign.

Busi­ness Lead­er­ship SA, which rep­re­sents many of South Africa’s ma­jor com­pa­nies, said that the man­ner and tim­ing of the Cabi­net changes were not in the eco­nomic in­ter­ests of the coun­try.

On Thurs­day, the SA Com­mu­nist Party (SACP) con­firmed re­ports that Zuma had in­formed them on Mon­day of his in­ten­tion to ef­fect a Cabi­net reshuf­fle and get rid of Gord­han and Jonas.

SACP deputy gen­eral sec­re­tary Solly Ma­paila said that Trea­sury must be han­dled with care.

Sizwe Pamla, a Cosatu spokesper­son, said that Zuma didn’t con­sult the trade union fed­er­a­tion on his plans to reshuf­fle his Cabi­net.

Pamla said that Cosatu didn’t have any per­sonal is­sues with any­one at Trea­sury, but they had ide­o­log­i­cal prob­lems with the in­sti­tu­tion. Cosatu, the SACP and the ANC to­gether form the tri­par­tite al­liance.

“There is a cul­tural and ide­o­log­i­cal shift that is nec­es­sary [at Na­tional Trea­sury],” Pamla said.

Black Busi­ness Coun­cil pres­i­dent Danisa Baloyi said in a state­ment is­sued on Fri­day that the busi­ness com­mu­nity should “en­gage the tough head­winds”.

“We fur­ther urge that the new fi­nance min­is­ter con­tinue to ex­er­cise fis­cal pru­dence, a painful but nec­es­sary mea­sure that is re­quired to sta­bilise our econ­omy.”

Pres­i­dent of the Pro­gres­sive Pro­fes­sion­als’ Fo­rum, Mzwanele Manyi, said that there was fi­nally cer­tainty in the fi­nance port­fo­lio and that the or­gan­i­sa­tion had con­fi­dence in Gi­gaba.

Na­tional African Fed­er­ated Cham­ber of Com­merce and In­dus­try pres­i­dent Lawrence Mavundla said the or­gan­i­sa­tion sup­ported the reshuf­fle of Cabi­net and saw it as ex­actly what the coun­try’s rad­i­cal eco­nomic trans­for­ma­tion agenda needed.

Mavundla also said that it was not fair that there were “su­per­min­is­ters” who could not be reshuf­fled and that the or­gan­i­sa­tion had full con­fi­dence in Gi­gaba and Buthelezi.

Black Man­age­ment Fo­rum pres­i­dent Mn­cane Mthunzi said he would com­ment at a later stage.

Cas­sim Coova­dia, man­ag­ing di­rec­tor of the Bank­ing As­so­ci­a­tion of SA, said he was ex­tremely con­cerned about how the Cabi­net reshuf­fle was done and that it def­i­nitely didn’t bode well for the econ­omy. The as­so­ci­a­tion would, how­ever, still work to­gether with the new min­is­ter and his deputy.

Esmé Arendse, a Ned­bank spokesper­son, said that, like many South Africans, Ned­bank was par­tic­u­larly dis­ap­pointed by the re­moval of Gord­han and Jonas.

“The risk of a fur­ther down­grade of South Africa by in­ter­na­tional rat­ings agen­cies is un­for­tu­nately once again a real pos­si­bil­ity,” she said.

TALK TO US How do you feel about the moves at Trea­sury? Is it the fi­nal nail in the cof­fin for SA’s rat­ings?

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