By Rafiq Raji, PhD
Emerging market economies currently in or teetering on the brink of recession eerily have one thing in common: political wrangling. Brazil recently impeached its socialist-oriented first female leader, Dilma Rousseff, who defiantly held on till the very last moment – hard as nails, that one. Still, Ms Rousseff’s meddling is in part responsible for Brazil’s current biting recession, almost two years old now. Russia has always been a political theatre of sorts, with its leader, Vladimir Putin, pulling the strings at almost every turn; also in recession since early 2015. Apart from soft crude oil prices, the Russian leader’s expansionism – borne out of a determination to retain influence in former Soviet Republics – has been blamed. The very competent former governor of the Reserve Bank of India and globally acclaimed economist, Raghuram Rajan, stepped down this month (4 September), the end of his first and only term. He probably saw the signs: the ruling political elite thought him too independent and a little too popular abroad. His halo was a little bit discomfiting, it is thought, for Indian prime minister, Narendra Modi. In South Africa, it has been one political drama after another, none exhilarating. Bizarrely, as in the Indian case, an underling, a high calibre one also, is supposedly punching above his weight; almost always the raison d’etre of most political conflicts. There is reportedly no love lost between the South African president, Mr Jacob Zuma, and his respected finance minster, Pravin Gordhan. Their wrangling is beginning to take a toll on the economy. Not that it didn’t hitherto: the rand has been edgy each time new disagreements between the two come to light.
Risk models have been adjusted
Last week, two financiers withdrew their support for some of South Africa’s state-owned enterprises (SOEs). Futuregrowth, an asset manager, worried increased political uncertainty now made it difficult to assess risk: supposedly business decisions are likely to be politically-induced. The second, Danish lender, Jyske Bank, went underweight the bonds of state-owned power utility, Eskom, citing governance concerns. More investors and financial institutions have probably done as much, or plan to, quietly. Such is the gravity of the crisis that the South African public enterprises minister, Lynne Brown, has asked investors to talk to her directly on concerns they might have about SOEs. That might seem like a proactive move. But it brings to fore the institutional deterioration there is, if that is what it now takes to reassure investors. She would probably be ignored. Mr Zuma’s cabinet recently announced a presidential co-ordinating committee for SOEs would be set up before year-end. Add to that, the beleaguered national carrier, South African Airways, announced last week, it would need at least US$1 billion in loans for immediate use to fend off a looming liquidity crisis that could cause the grounding of some of its aircrafts and so on. Even as the revelation is a stinging indictment of the carrier’s management led by chairperson, Dudu Myeni, who has been severally accused of mismanagement, Mr Zuma is unfazed: Ms Myeni has been re-appointed.
As if all these were not enough, the South African cabinet last week supposedly considered the constitution of a judicial enquiry to investigate the propriety in banks’ decision to pull the plug on firms owned by the Gupta family – wealthy Indian immigrants whose close ties with Mr Zuma, have been a source of tremendous controversy, based on a press statement (1 September) released by mineral resources minister, Mosebenzi Zwane, who chairs an inter-ministerial committee on the matter. After an uproar, in the press and by market participants, at such brazenness in the face of a struggling economy and already nervous investors, Mr Zuma’s office disowned Mr Zwane’s claims, regarding them as his personal opinion. Had it gone ahead – not that it wouldn’t in the future (in one form or another) while Mr Zuma is still at the helm, the enquiry would have had the mandate to review key banking laws, with the ultimate aim of curbing the influence and powers of the Treasury and South African Reserve Bank (SARB). These series of events in Africa’s most industrialized economy have been viewed in a very negative light. And rightly so. One of the likely consequences may very well be an all but certain ratings downgrade to junk status before year-end by one of the three leading rating agencies, SPGlobalRatings probably.
News that Mr Gordhan might be arrested on graft charges broke last week. Even after fervent denials, the police insisted Mr Gordhan show up at its offices for questioning. As was his legal right, Mr Gordhan declined. To avoid a potential media backlash – the typical refrain is that no one is above the law, Mr Gordhan’s lawyers presented an elaborate testimonial of how much cooperation their client had already offered the police. That is beside the point though. The officials of a well-run government should not have to work at such cross purposes in full glare of the public, especially considering how sensitive Mr Gordhan’s treasury portfolio is. Even as Mr Zuma has made numerous statements about how much confidence he has in his finance minister, even making him come along to the G20 meeting recently held in China, it is abundantly clear they are not on the very best of terms. It may be just the right time for Mr Gordhan to take a bow – my column of 1 March 2016 (“Gordhan’s burden”) might be worth a read.
The South African experience is just an example of the potential costs to an economy when politicians begin to interfere – often untowardly – in how supposedly independent and reputable institutions are managed. There are lessons in the whole saga for the Nigerian government, which is currently contemplating more aggressive interventionist measures to stem the tide of a now officially confirmed economic recession. To think only just recently, political meddling at the Nigerian central bank, proved to be tremendously costly. Unfazed it seems, the Nigerian government is believed to desire the lowering of interest rates by legislation, akin to that recently done in Kenya. An economic emergency declaration is also being mulled: it could involve asking banks to issue loans to specific individuals, companies or sectors, irrespective of their risk profiles, determining how interest rates are set, deciding who gets foreign exchange (and at what price) and so on. Such moves would be received negatively by market participants. In the event, Nigerian authorities might find planned foreign borrowings unpalatable, as international investors likely price in a higher political risk premium. Already red-eyed foreign investors would not suffer fools gladly.
Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). See link viz. http://www.businessdayonline.com/en/political-meddling-costs-economies/