Under-Fire Gordhan’s Trial of Strength Over S. Africa Budget

  • Fraud charges raise risk of finance minister losing post
  • Gordhan is no ‘wizard’ to conjure economic growth: Ashbourne

With his job on the line, fraud charges hanging over his head and university students rioting for free education, South African Finance Minister Pravin Gordhan’s resolve to maintain fiscal discipline and avoid a junk credit rating is facing a severe test.

Gordhan, due to present his mid-term budget in Cape Town on Wednesday, says he will deliver on his promise in February to rein in spending and the deficit, even though the economy is growing slower than previously forecast. His feuding with President Jacob Zuma, 74, and charges by prosecutors that he illegally approved the retirement of a former colleague, have raised doubts about whether he can meet that pledge.

“Steering South Africa’s listing economy back towards sustainable growth would be a herculean challenge at the best of times, and Mr. Gordhan also seems to be fighting a full-blown war against actors within his own government,” John Ashbourne, an economist at Capital Economics Ltd. in London, said in an e-mailed response to questions. “The markets aren’t really worried about whether or not Mr. Gordhan will make the right announcements. The question is whether or not he will be around to follow through.”

Nuclear Power

Gordhan, 67, and Zuma have butted heads over the affordability of nuclear power plants the president wants to build, and the management of state companies and the national tax agency. Then there’s the Gupta factor: Gordhan produced an affidavit this month implicating members of the family, who are friends of Zuma, and companies they control in “suspicious transactions” valued at 6.8 billion rand ($485 million) during the past four years. The Guptas called the allegations “undiluted nonsense.”

While the fraud case that prosecutors are scheduled to bring to court on Nov. 2 has fueled speculation that Gordhan will be fired, the likelihood of that happening eased last week after he won backing from the cabinet and Zuma appointed him to an education task force.

Gordhan is the third finance minister the country has had since last year’s mid-term budget. Ruling party and business leaders persuaded the president to reappoint Gordhan to a post he held from 2009 to 2014, after the naming of a little-known lawmaker as finance minister triggered a sell-off in the rand and nation’s bonds.

Political Turmoil

S&P Global Ratings, which has a negative outlook on South Africa’s BBB- assessment, the lowest investment grade, has highlighted political turmoil as a potential game-changer, and warned that the risk of a downgrade will be heightened if the government fails to stick to its fiscal targets. The ratings company, which is due to issue its next review on Dec. 2, has said it’s also concerned the independence of the National Treasury and central bank is being undermined.

Gordhan, who’s called the fraud charges “frivolous” and a political stitch-up, has given no indication that he’s prepared to loosen the purse strings.

“When you have low growth, you have low revenue,” he said in an Oct. 19 speech to a South African Chamber of Commerce and Industry conference in Johannesburg. “When you have low revenue and there are challenges in terms of how much money you can borrow,  you have a very constrained environment. We hope that we will be able to deliver some clear messages on the kind of situations we find ourselves in.”

The chief executive officers of about 80 South African companies including Naspers Ltd., the country’s biggest, took out a full-page advertisement in the Johannesburg-based Sunday Times pledging their support for Gordhan.

“We stand as one for the rule of law and against the decision to prosecute the minister of finance on charges that are, according to the preponderance of expert legal opinion, without factual or legal foundation and not in the public interest,” they said. “We stand against the damage this has caused to our economy and to the people of South Africa, especially the poor.”

Rioting Students

Even if Gordhan does keep his post and gets his way with the budget, it’s unclear whether the rest of the government will stick to it, according to Ralph Mathekga, a political analyst at the Mapungubwe Institute of Strategic Reflection, a Johannesburg-based research group.

“The environment is such that one cannot actually tell if the budget will be meaningful or not,” Mathekga said by phone. “The budget needs buy-in from other departments. If it is only the minister’s budget, it will not go anywhere because it will not be implemented and supported. ”

Besides facing political headwinds, Gordhan is also contending with demands for free education from students who’ve bought university campuses to a standstill for several weeks. While the government has agreed not to increase 2017 fees for students from households earning less than 600,000 rand a year, it says free tertiary education is unaffordable.

Students broke into the parliamentary precinct on the day of last year’s speech and clashed with police. Violent protests for no fees started again last month, seeing running battles with security personnel shooting rubber bullets and tear gas as demonstrators setting vehicles and buildings on fire.

Gordhan’s Weakness

While Gordhan is likely to keep spending in check by using contingency reserves and cutting costs, he probably won’t be able to persuade the government to push through changes to labor laws and other policies that are key to bolstering growth and investment, Peter Attard Montalto, senior emerging-market strategist at Nomura International Plc, said in a note to clients.

“Investors now appear more jaded about South Africa’s good news story,” Attard Montalto said. “Markets have finally come to the view that Pravin Gordhan doesn’t have the power to effect widespread structural reform in the absence of a decisive centralized political leadership.”

The International Monetary Fund expects the economy to expand 0.1 percent this year and 0.8 percent next year, well below the 6 percent the government is targeting to reduce a 27 percent unemployment rate.

“All depends on getting the economy growing again,” said Ashbourne, the Capital Economics economist. “Gordhan might be respected, but he isn’t a wizard. He can’t magic the economy back to growth. I don’t envy his position.”

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