The announcement of a cabinet reshuffle in the early hours of 31 March 2017 and the subsequent axing of Pravin Gordhan as minister of finance, will go down in history as a watershed moment in South Africa on par with the sacking of Jacob Zuma as deputy President (2005), the recall of Thabo Mbeki as president (2008) and the appointment of Des van Rooyen in the Nenegate scandal (2015). Not only did the events of the last two weeks created immediate uncertainty in the financial markets and elsewhere; but it definitely impacted on the ANC reputation. It seems as if the self-preservation of senior individuals in the ANC leadership weight heavier than national interest.
When the announcement of the cabinet reshuffle was made, the reaction was one of predictable outrage. We should not underestimate this current crisis – we have been there before. This reshuffle was long coming and expected since September 2016 following the ruling ANC's poor showing in the local government elections in August 2016.
Officially the reason for the cabinet reshuffle was given as an intensifying of radical economic transformation, a theme that President Zuma started pushing on this January 8th statement and in the State of the Nation Address on 9 February 2017. In the SONA Zuma defined radical socio-economic transformation as: "... (we) mean fundamental change in the structure, systems, institutions and patterns of ownership, management and control of the economy in favour of all South Africans, especially the poor, the majority of whom are African and female, as defined by the governing party which makes policy for the democratic government".
There is no doubt that the March 2017 reshuffle was a power overreach rather than the radical economic transformation used by President Zuma to justify the move. Three issues point to that overreach:
- A dislike by Zuma of the fact that he was forced to appoint Pravin Gordhan as minister of finance in December 2015 following the Nenegate scandal when a totally unknown back-bencher, Des van Rooyen, was appointed minister of finance for four days;
- That Pravin Gorhan was adamant not to sign any Nuclear Deal commitments that National Treasury was of the opinion that is was unaffordable;
- That Zuma did not consult senior ANC and Alliance leaders on the cabinet reshuffle in line with the decision of the Polokwane Conference in 2007, that was aimed to correct the perception that Thabo Mbeki did not consult enough.
However, this power overreach was done cold and clinically on the side of Zuma based on two very important political "insurance policies" that he took out at the Mangaung Conference in 2012. During that conference, Zuma elected the top six leaders of his choice, including Cyril Ramaphosa, but he did more than that. He also made sure that the National Working Committee (NWC) and the National Executive Committee (NEC) supported him overwhelmingly (Conservatively up to 70 percent of members of the NWC and NEC are regarded as Zuma supporters). Despite the opposing views from Cosatu, the SACP and three of the top six (Gwede Mantashe, Cyril Ramaphosa and dr Zweli Mkize) Jacob Zuma reshuffled his cabinet and left out Pravin Gorhan and several other ministers, keeping poor performers, but loyal ministers in their posts.
SA should on strictly economic grounds probably have had its investment rating downgraded sooner.
This power overreach by Zuma is the second time that the ANC policy of containment failed. When Zuma was appointed in 2007 as president of the ANC, senior leaders were concerned about his personal finances, his personal life and other issues that may have caused reputational damage to the ANC. That arrangement was unofficially called containment. Zuma broke with containment in at least two major crisis, i.e. the Nenegate Scandal in December 2015 and the unilateral reshuffle in March 2017 where Pravin Gordhan was fired and 19 other changes were made.
The tragic death of Ahmed Kathrada during the week of high drama at the end of March provided for the anti-Zuma sentiment to overflow, not only in highly emotional speeches, but also the nation-wide protests on 7 April and the planned motion of no confidence on 18 April 2017. Despite Prof Njabelo Ndebele referring to the Zuma Presidency as a syndicated criminal government and Pravin Gordhan challenging the audiences to "connect the dots"; none of these issues would cause Jacob Zuma to change tack. However, it all added to continued pressure on the Zuma Presidency and provided some letting out of political steam and frustration. The ground-swell reaction to the actions of President Zuma may have a crucial impact on the ANC's position as the dominant party at the next general election in 2019, apart from the economic consequences.
This is especially important viewed against the results of the Stats SA report that was published op 31 March 2017. This report finds that 75 percent of households in South Africa did not belief that municipalities were actively addressing the issues they felt was most important for households in their respective municipalities (StatsSA, State of basic service delivery, March 2017), Stats SA language for saying 75 percent of respondents says they are unhappy with service delivery. The challenge to the revamped Cabinet as a whole is to respond to the on-going concerns of service delivery.
Politically the table is set for a severe battle of ideas and policies at the ANC Consultative Conference in June-July 2017 and a very intense leadership contest at the ANC Elective Conference in Gauteng in December 2017. Jacob Zuma has won this political battle, but he may have lost the war in the long term when inevitably facing two centers of power in 2018 and 2019. This may well be a bridge too far. Key Cabinet reshuffles, like election results, also have economic consequences. The Cabinet reshuffle, and the subsequent negative reactions from business, labour, the markets and credit rating agencies now loom large in SA's economic scenarios. As indicated above, although these events were not entirely unexpected, their context and timing have been uncertain and their potential economic impact remains wide.
We must also not underestimate the significance of the precedents Gordhan and the National Treasury have successfully set in resisting vested interests, obstructing their obvious desire to capture State institutions for selfish ends, and generally wanting to apply orthodox fiscal discipline wherever possible. Despite his on-going efforts, however, SA should on strictly economic grounds probably have had its investment rating downgraded sooner, had Gordhan not been very persuasive about the prospects for recovery and reform in the SA economy. Gordhan, who together with business and labour formed a 'Team SA', had thus fended off immediate investment downgrades from the credit rating agencies. The team convinced the credit rating agencies and investors to give SA the benefit of the doubt and in the process won their confidence, pending the better times which were said to be around the corner.
Indeed, during Gordhan's recent 15 months in office as Finance Minister, the rand moved from being among the world's worst performing currencies, to becoming one of its best in recent months. Yet this broad assessment must, of course, be less about personalities than about institutions being seen to follow the right policies and implement anti-patronage decisions. It revolves around policies affecting procurement, nuclear power, state-owned enterprises and banking licenses as influenced and managed by the Treasury. Much of this has now been put in jeopardy and hence the decision by Standard and Poor to reduce SA's investment rating to 'junk' status. The economy has inevitably become a casualty of political in-fighting.
The challenge is to restore and deepen the confidence between government and business in particular. This may be awkward when the mainstream of business have by now publicly denounced the decision that led to Minister Gigaba's appointment.
How bad can it get economically? SA still has a resilient economy, which has shown itself to be able to absorb many previous shocks and still recover. And when markets go bad there are also buying opportunities, not only downside risks. If the new team at the National Treasury can succeed in winning back investor confidence SA might avoid a 'worse case' economic scenario, if it takes the right decisions from now on and implements them. But according to Peter Attard Montalto at Nomura and some other analysts the market's assessment of SA's assets may still be too optimistic. 'This is an attack on the institution of the National Treasury and as such will trigger multiple downgrades. Zuma believes he is, and we think he is, much stronger than the market thinks he is', says Montalto. Against this political background, then, what are some of the areas of economic vulnerability for SA, if no remedial action is taken to ameliorate them? What is the powerful wake-up call here?
Firstly, a persistently weak rand will eventually feed through to the local cost structure, especial into food and fuel prices, which will in due course hit those who can least afford it, namely, the poor. The temporary benefits to exporters and tourism of a volatile currency are not enough to offset the wider long run costs. At its recent Monetary Policy Committee meeting the SARB also signalled that more interest rate hikes could be on the cards if the risks to the inflation outlook deteriorated. This is despite the fact that, until the latest political risks to the currency intervened, the SARB was hoping that SA may have reached the end of the interest rate tightening cycle. If the advent of 'junk' status leads to higher borrowing costs for both the public and private sectors, the squeeze on the Budget in turn will ultimately lead to less funds for social grants and other laudable developmental priorities.
Secondly, analysts and the capital markets will be closely watching fiscal policy as it unfolds under the new political team at the National Treasury, especially the next Medium Term Budget Policy Statement in October. Finance Minister Gigaba has promised no change in the current fiscal stance. But the guarantees given by the Treasury to underpin the contingent liabilities of vulnerable state owned enterprises like Eskom, for example, are still a high risk area and threaten to undermine fiscal stability. Then, bearing in mind the existing concerns about the excessively high public sector wage bill, the approach taken by Finance Minister Gigaba when the next round of public sector salary and wage negotiations commence soon will also be critically assessed. Only if SA aligns its State expenditure to the size of its GDP and the size at which it grows, can it avoid a 'debt trap'.
Thirdly, it is inevitable that forecasts about SA's economic outlook will now have to be reviewed. The danger here is that the aftermath of the investment downgrades will have a corrosive effect on SA 's growth prospects, investor confidence and job creation, at a time when the country was instead looking forward to an improved economic performance in 2017. The negative effects of 'Nenegate', the impact of the prolonged drought and consequences of load-shedding were steadily dissipating last year and the business cycle bottomed out towards the end of 2016. The recent forecast by both the Treasury and the SARB that the SA economy could grow at about 1.3 percent this year is nonetheless now looking decidedly optimistic. Persistently low growth will also have tax implications for the Budget.
Fourthly, the political changes at the Treasury, the latest narratives from the credit rating agencies, the recent emphasis on 'radical economic transformation' - all these factors have now converged to heighten policy uncertainty. The rhetoric and meaning of 'radical economic transformation' in particular has thus far created confusion. The threats of land expropriation without compensation have unsettled confidence in the agricultural sector. The persistent existence of policy uncertainty has hampered the private fixed investment needed to mainly drive growth and job creation. Policy uncertainty is like a tax on investment and must be minimised wherever possible.
Fifthly, the damage caused by recent political decisions - and the way they were implemented - to trust and confidence in the important relationships which former Finance Minister Gordhan developed with business and labour need to be urgently repaired. The previous stakeholder cooperation with Gordhan must not look like a once-off aberration. The challenge is to restore and deepen the confidence between government and business in particular. This may be awkward when the mainstream of business have by now publicly denounced the decision that led to Minister Gigaba's appointment. Yet unless there is now real, detailed re-engagement and fresh dialogue between government and the business community about the way ahead for the economy, the outcomes will be even worse in terms of growth, jobs and investment than is yet imagined. 'Improved business confidence', says prominent American economist Larry Summers,' is the cheapest form of economic stimulus'.
Finally, one of the major reasons why former Finance Minister Gordhan and his team worked so hard to avert 'junk' status was the realisation that, once it happens, it is not easily or quickly reversed. International experience suggests that on the whole it can take between three to five years, or even longer, to shed 'junk' status. SA must now aim to regain positive investment grades. It will therefore need to strengthen its credibility in the period ahead by embarking on the fundamental economic reforms it promised to undertake, by maintaining a strong and credible Treasury, by promoting good governance and by pursuing policies which are clear, consistent and growth-oriented. It means reaffirming the broad message of the National Development Plan as the irreversible policy framework for both the public and private sectors. Anything in serious conflict with it must be modified, changed or withdrawn, if SA is to regain its investment credentials sooner rather than later.
In conclusion, if SA is not to languish in a 'low growth trap' in the years ahead, it will need to urgently demonstrate how it proposes to successfully pursue a steeper growth trajectory for the economy. Growth is 'not a cure for all diseases', an end to all distress', but inclusive growth makes other developmental problems easier to handle and softens conflict among them. As SA currently weighs the risks and opportunities arising out of its present predicament the popular adage 'never waste a good crisis' is apposite. But can SA prove the sceptics wrong? Nelson Mandela, if he were to return, would nevertheless be shocked that this question needs to be asked.