Gordhan’s burden

By Rafiq Raji, PhD

Published by BusinessDay Nigeria Newspaper on 01 Mar 2016. See link viz. http://businessdayonline.com/2016/03/gordhans-burden/ 

Second comings in politics are treacherous. I fear a great deal for South Africa’s finance minister Pravin Gordhan. Not that I think him a saint or anything. The fragility of his newfound power is becoming writ large all too early. Mr Gordhan delivered a fine budget speech on 24 February. Even the usually disruptive members of the ultra-leftist Economic Freedom Fighters were surreally attentive during the speech. In contrast, the EFF has used every opportunity to embarrass the country’s president whenever he appears in parliament. They even walked out on him at his most recent state of the nation address. After the budget speech, the EFF issued a surprisingly supportive statement; albeit they were quick to point out a higher target for cutting wasteful expenditure could have been set. For instance, the finance minister proposed about 25 billion rand in wasteful expenditure would be cut over the next three years. This is about the same amount the country’s auditor highlighted as wasteful spending each year. The warm reception received by Mr Gordhan has definitely not gone unnoticed by the South African leader. Still, most of the commentaries I have read since suggest the finance minister could have done much more. There is a consensus he has limited political space to enforce needed reforms. But by not announcing much stronger fiscal consolidation measures now, he may have missed his best chance of doing so. Mr Gordhan has about a three-month window to succeed. Should South Africa’s credit rating be downgraded by Fitch or Standard and Poor’s in June – as is increasingly likely, President Jacob Zuma may not need his credibility anymore. Mr Gordhan needed to have announced measures so far-reaching it would have left ratings agencies with little choice but to reconsider a potential downgrade. Such symbolic and quick-win measures like the rationalization of ministries and reduction in the size of government would have been tremendously reassuring to ratings agencies. What Mr Gordhan’s budget has done is set a ceiling – adjudged to be still low – for potential reforms. The problem is that much of what is good about the budget are slated for much later, when perhaps Mr Gordhan would have since been dispensed with. The finance minister aims to reduce the fiscal deficit to 2.4 percent of GDP in the next three years from an estimated 3.9 percent in the 2015/16 fiscal year. Market participants are skeptical Mr Gordhan would be able to fulfill his promise.

Markets were also rattled by revelations on 26 February that attempts were made to disorient the finance minister days before his budget speech. He reportedly threatened to resign afterwards, a move that would have been tremendously damaging to investor confidence. Confirming the incident, Mr Gordhan said he received a letter from the country’s elite police investigative unit asking him to elucidate on the activities of an alleged rogue unit at the South African Revenue Service, which is believed to have spied on top politicians during his previous tenure as finance minister from 2009 to 2014. Mr Gordhan has always maintained the tax agency acted within the law. There have been other incidents that suggest the finance minister may not have the full support of his principal. Well, officially, he does. But then President Zuma announced ‘below-inflation’ salary increases for political office holders a couple of hours before his finance minister was slated to present an austere budget. Days before, President Zuma took a not so veiled swipe at the academic qualifications of his highly regarded finance minister. Mr Gordhan has a degree in pharmacy. Desmond van Rooyen – the much criticized replacement for the respected former finance minister Mr Nhlanhla Nene who was sacked in December – has a master’s degree in finance but is awfully inexperienced. President Zuma is adamant Mr van Rooyen is the most qualified finance minister he has ever appointed. Mr Gordhan must be mighty glad he can count on support such as this. Nonetheless, there is clearly a determination on Mr Gordhan’s part to see the back of the South African Revenue Service commissioner, Mr Tom Moyane. He has reportedly asked that Mr Moyane be removed. President Zuma is believed to have demurred. A seemingly frustrated Mr Gordhan remonstrated publicly about the breakdown in his relationship with the tax agency chief who is functionally his subordinate. Mr Moyane was appointed by President Zuma and has his full support. Thus, were Mr Moyane to be let go at Mr Gordhan’s urging, the symbolism alone would probably be more politically damaging to President Zuma than the December debacle. Mr Gordhan should probably have insisted on Mr Moyane’s removal before accepting to return as finance minister. Now, he does not have much leverage.

Bear in mind, all these happenings have occurred amid recent race-related and sometimes violent protests at the country’s universities that could spread nationwide. In comments to the media, Mr Gordhan believes a clearer outlook on his future would be palpable by October. If either or both of Fitch and S&P downgrade South Africa to junk status in June, he may not have that luxury. I think June is much more apt. Mr Gordhan has inevitably tied his longevity on the job to the country’s credit rating. If South Africa manages to escape a downgrade in June – a remote possibility, he may have the power to do so much more than he announced in the budget. A downgrade suits the political calculations of the finance minister’s opponents. And he knows. These revelations of infighting at the country’s finance ministry have certainly undermined confidence. What could only be inferred is now palpable. It is now very clear Mr Gordhan does not have the political backing he needs to fulfill the promises he made in the budget. This truth is not lost on markets. And he cannot resign just yet. He has to wait till June at least. Mr Gordhan’s challenge is eerily familiar. He is going to get bruised. Sadly, the ultimate casualties would be poor South Africans.

Also published on my company’s website on 02 Mar 2016. See link viz. http://macroafricaintelligence.com/2016/03/02/thematic-gordhans-burden/

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