Many see the decision by South Africa’s
governing African National Congress (ANC) to send the disgraced former
CEO of the power utility Eskom to parliament as the precursor to another attack on
the National Treasury and to remove finance minister Pravin Gordhan.
The decision to give Brian Molefe a seat in the country’s
parliament has led to widespread speculation that he is being
positioned for a cabinet post – either as finance minister or as deputy finance
minister. While some commentators believe that President Jacob Zuma has his
sights set on appointing Molefe as finance minister, others argue that
the real target is Deputy Minister Mcebisi Jonas. The deputy minister blew
the whistle on an alleged bribery attempt by a member of the Gupta family
which is at the centre of a political storm amid allegations that it has
attempted to exert undo influence on Zuma.
Either way, there is no doubt that Molefe’s appointment
to either position would cause substantial turmoil in the country’s financial
system and cost South Africa billions of rand.
The cost of the rand taking a knock
South Africa would take a massive economic blow because
its currency would depreciate dramatically. The rand fell through
the floor the last time Zuma made a misbegotten attempt to install one
of his cronies at the helm of the National Treasury in December 2015.
This should worry South Africans. The country’s current
account deficit in
the third quarter of 2016 was 4.1 percent. This means that the sum of imports
and external debt – borrowing from abroad – is larger than the sum of its
exports and lending abroad. Mineral products, machinery and chemical products
alone constitute more
than 50 percent of South Africa’s imports. A weaker rand would make these more
expensive since the country would have to pay more rand per dollar value. This
means that prices for everything from consumer products to transportation would
go up. South African firms, which often depend on intermediate inputs from
abroad, would face a rise in the cost for their products and an erosion of
their profits. As a consequence, fewer people would invest in the country.
A currency depreciation would affect investors in other
ways too. A weaker rand would diminish their returns and they would therefore
be more likely to look for investment opportunities elsewhere. Not only will
they stop investing, they would also likely unwind their existing positions.
This in turn would drain liquidity from the financial system, making banks less
likely to provide new loans for businesses. The knock on effect would be lower
growth and higher unemployment.
It is difficult to put a number on the impact of a sudden
depreciation of the rand. But some simple back-of-the-envelope calculations can
help. South Africa spends roughly $10 billion more on imports than it gets from
exports. This corresponds roughly to R130 billion per year. If the rand weakens
from 13 to 14 rand per $1, the country would need another R10 billion to
finance its trade imbalance.
South Africa has watched this movie before. Between
November 2015 and January 2016 when Zuma installed the backbencher Des van
Rooyen as finance minister the rand weakened from R14.4 to R16.9 per dollar.
This R2.5 increase per dollar corresponded to additional R25 billion cost to
finance our trade deficit. On top of this private investors are
estimated to have lost R171 billion after finance minister Nhlanhla Nene was
fired in 2015.
Secondary effects
Removing either the finance minister or his deputy would
also result in rating agencies downgrading the country’s investment rating to
junk status.
Zuma has shown in the past that he has no clue about the
impact of ratings on the country’s finances. Amidst threats of downgrade late
last year Zuma was quoted as saying:
But although
they’re important, their ratings don’t necessarily have an impact on the
agreements and commissions South Africa have entered into with other countries.
This simply is not true. A downgrade affects the interest
rates on every new bond issuance. Every year some of our outstanding R2 trillion domestic and
R141 billion foreign denominated debt has to be rolled
over. Debt services are already at roughly R150 billion per year – the
second largest position in the country’s budget.
A 5% increase in the country’s refinancing cost would already cost South Africa
additional R7.5 billion every year. Money that is missing to finance social
grants, healthcare, police or student bursaries.
The banking group Absa did some sample calculations on
how a ratings downgrade would affect the average South African. It concluded
that every adult person would lose roughly R2,000 because a ratings downgrade
would mean that the banks themselves would face higher refinancing costs. These
would be passed on to their customers.
These numbers mirror a World Bank estimate that
a ratings downgrade in South Africa would result in a reduction of R1 000 per
capita by the end of 2017.
The numbers paint a clear picture. Zuma’s last attack on
the National Treasury cost South Africa billions. Molefe’s appointment
would be seen as another attack on the institution given that he was implicated
by the former public protector Thuli Madonsela in her state capture report.
The effect of his appointment would be equally costly for the country.
South Africans should not allow this raid on the National
Treasury to happen. The last time Zuma and his allies attempted to capture a
well-functioning institution for their own personal gains the private sector
gave them a hiding. The good news is that it is likely that markets will show a
strong reaction this time, too. The question is whether ordinary South Africans
realise the threat that a captured National Treasury would pose to their
wallets and stand up before it is too late.
Dr Co-Pierre Georg is a senior lecturer at the African Institute for Financial Markets and Risk Management (AIFMRM) at UCT.