South Africa back from brink after finance minister fiasco

The country held its breath as the rand and shares plunged after the president sacked his finance minister. Order has been restored, but how long the stability can persist is open to question.

South African president Jacob Zuma, right, shake hands with newly appointed minister of finance David Van Rooyen, left, after a swearing ceremony on December 10, 2015 at the Union Buildings in Pretoria. South Africa’s rand dropped to historic lows on December 10 after president Zuma sacked his respected finance minister in a move that triggered widespread fears about the country’s economic outlook. AFP
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CAPE TOWN // South Africa stood on the edge of the economic abyss this month, teetered on the brink for two excruciating days, and then took a step back. Late on the night of December 13, after the most tumultuous week in its post-apartheid existence, a clearly panicked and battered president, Jacob Zuma, caved in to pressures from the markets and removed the finance minister he had appointed only 96 hours before.

Mr Zuma replaced him with the tried and trusted Pravin Gordhan, who returned to the job after an absence of 18 months to become the country’s third finance minister in four days.

Fortunately it did the trick, at least for the time being, and the rand and share prices, which had fallen by 10 per cent and 20 per cent respectively in just two trading sessions at the end of the week ending December 11, recovered more than half of the ground they had lost by the middle of the following week. But it didn’t recover the lost confidence in Mr Zuma’s presidency, or in the South African economy, which remains in the danger zone.

For the moment, the credit agencies have held off from downgrading the country’s debt to junk status, which would plunge the economy into an uncontrollable spin, but last Tuesday the ratings agency Moody’s cut its outlook on the country to “negative” from “stable”, citing structural challenges in the South Africa’s mining industry and increasing political pressures. The country, it added, faces a “prolonged” period of slow growth and increasing political pressures.

Fitch ratings agency, which has South Africa just one notch up from junk, also put it on warning, saying that the weekend’s torrid events “have not enhanced confidence” in the government’s effectiveness and “leaves questions over the direction of economic policy”.

The crisis is far from over and there is now a serious prospect that, unless Mr Gordhan can force Mr Zuma and his increasingly left-leaning government into serious expenditure cuts and a period of unpopular austerity, the IMF may have to be called in. Political commentators last week shuddered to think about the consequences of the austerity measures the IMF, seen as an essentially western and capitalist-driven institution, would impose. Those consequences could include open revolt from the South African Communist Party, part of the government, from the trade unions and from the fiery Julius Malema, leader of the Economic Freedom Front, which is demanding nationalisation without compensation and even more government spending.

It could also mean marches on Pretoria, mass sit-ins, a general strike, riots on the streets, a flow of foreign capital out of South Africa and the collapse of the rand.

And it would mark the end of Mr Zuma, but too late to recover from the vast damage he has inflicted on an economy where employment is nearing 40 per cent and the government sector has grown to unsustainable proportions.

The latest crisis began on the evening of December 9, when Mr Zuma abruptly, and without explanation, sacked one of the few able and well-regarded members of his cabinet, the finance minister Nhlanhla Nene, and appointing instead an unknown apparatchik called David van Rooyen whose sole qualification is a distance diploma in economics from the University of London.

The reaction was immediate and devastating. Over the next two days, the currency collapsed, dropping through 15 rand to the US dollar, half its level of just three years ago, and went on down below 16 rand beforesettling at 16.1 rand to the dollar. Banks and financial shares fell by 20 per cent in just two trading sessions, causing even the faraway London stock market, where South African groups including Anglo American (which to survive had just abandoned its dividend), Old Mutual, Investec, Mondi, SAB Miller, Liberty and others are traded, to take a tumble.

The 17 financial and property shares in the JSE’s Top 40, the biggest companies traded by market capitalisation on the country biggest stock market, lost a combined 290 billion rand in just two trading sessions, almost the size of the entire gross national product.

It proved too much even for Mr Zuma whose reaction to past crises has basically been to laugh them off, blaming them on “the economists” – by which he means the business sector – or on the international markets, which he feels have no right to interfere in South African affairs.

In this case however, threatened by resignations from his usually docile cabinet, his nerve snapped and he removed Mr van Rooyen, just four days into the job, and recalled the veteran Mr Gordhan, Mr Nene’s former boss and a man of integrity and professional competence.

Mr Gordhan has done it before, keeping the leaky economy afloat through the 2008/9 global banking crisis with a mixture of austerity and job stimulation policies. Before that, as head of the Revenue Service, he transformed the country’s finances in the early 2000s by creating one of the most efficient tax systems in the world.

But he is no friend of Mr Zuma, who hated the constraints he tried to impose last time around, and also because he opposed the president’s grandiose US$1 trillion deal with the Russian president Vladimir Putin to buy eight nuclear power stations. Last year, the president, as he invariably does with anyone who crosses him, removed Mr Gordhan to the lowly role of minister of local government (now occupied by Mr van Rooyen) and appointed his deputy Mr Nene to the job. Mr Nene however proved no more compliant, and when he insisted on changes to the president’s nuclear deal at a cabinet meeting, he was gone within hours.

Back in the job after an absence of 18 months, Mr Gordhan moved with commendable speed and certainty, and within hours the panic had subsided and equities and the currency had clawed back more than half their losses. More importantly, his return and his promise that “we will only spend what we have” and that “fiscal discipline will remain”, may make all the difference to the decision by the ratings agencies, which are waiting for the budget in February before making their next move.

Economists estimate that the extra costs of servicing South Africa’s growing debt if the rating fell to junk would be $1.5bn to $2bn a year, an unsupportable blow to an already stalled economy dogged by labour problems, lack of skills, a collapsing education system and corruption that ministers no longer bother to apologise for.

Mr Gordhan’s first press conference last Monday struck all the right notes. He is an impressive man – self-confident, authoritative, informed, clever and clearly on top of detail he had only had a few hours to refresh himself about. He is also witty and disarming, and his asides and gentle put-downs defused many of the issues which had raised their ugly heads in the preceding three days. But he was also very clear he was going to take no hostages, adamant that Mr Zuma is not going to get his nuclear deal without going through the proper tendering process and independent financial evaluation. That’s a big blow for the president, who is accused by the opposition and press of expecting a hefty commission from Mr Putin.

Even more contentious – and Mr Gordhan reserved his most cutting remarks for this one – is the controversy raging over the decision by the board of the state-owned airline, SAA, to restructure the terms of an order for five Airbus 330-300s needed to replace its ageing fleet. Most commentators believe that it was Mr Nene’s opposition to the unusual financing terms of the deal proposed by the airline’s chief, Dudu Myeni, which cost him his job.

Ms Myeni presides over an organisation that is basically dysfunctional. SAA has had seven executives in four years (not all under Ms Myeni’s reign), and several complete board changes.

Regulators and police are investigating allegations of bribery, fraud and the mysterious circumstances in which it has sold some of its choicest routes, such as Cape Town to London, its single prestige route where BA and Virgin are now cleaning up, and where there is barely a spare seat to be had this season.

Its relationships with the predominantly white pilots have also broken down amid accusations they were planning to sabotage a plane flown by a black pilot, dismissed by the pilots as “preposterous”.

But Ms Myeni is close to Mr Zuma, who has stood by her through everything. When her two successive ministers, her putative bosses, challenged her they were sacked by the president.

When a third minister, Lynne Brown, asked too many questions, Mr Zuma simply removed responsibility from her and gave it to the National Treasury, headed by Mr Nene. However, he proved no walkover, and when he told Ms Myeni to reverse her decision on the Airbuses she refused – and Mr Nene too got the chop.

Mr Gordhan is made of even sterner stuff, and in the circumstances surrounding his return to power he is probably bulletproof. This week he gave Ms Myeni due warning: “It is time individuals stopped playing with the state-owned industries,” he said, and using them “like toys” to extract money from whenever they wish.

That’s a pretty tough thing for a finance minister to say about a woman often described in the media as the president’s girlfriend and the chairwoman of a state-owned enterprise, and shows just how confident Mr Gordhan is in his position.

It is also the message the markets wanted to hear.