Johannesburg - The news that Finance Minister Pravin Gordhan has been charged with breaking public finance rules by granting a colleague early retirement yesterday sent the rand and share prices reeling.
The rand dropped as much as 3.4 percent against the dollar on the latest legal problems for the finance minister who maintained that he was the victim of a politically motivated campaign over the last few months.
In line with the weaker rand, South African bank stocks fell by almost 5 percent to a four-week low. According to Bloomberg data, almost R34 billion in value was wiped off the index.
Government and dollar bonds also fell sharply, while the cost of insuring exposure to South African debt leapt to three-month highs.
Investors and rating agencies back Gordhan’s plans to rein in government spending in an economy that has been forecast by the Reserve Bank to grow at just above zero percent this year.
A cut to”junk” status in ratings reviews due later this year will push up South Africa’s borrowing costs, making it harder to plug the budget deficit.
Political risk
Analysts said the Gordhan summons increased the political risk of doing business in the country. “This will further erode confidence in the political and economic management of South Africa,” said Daniel Silke, the director of Political Futures Consultancy. “It will potentially affect our chances of sustaining the current rating agency levels.”
Annabel Bishop, Investec’s chief economist, said: “South Africa is at risk of dropping to sub-investment grade on its path to the potentially game-changing 2019 election, with consequent heightened financial market volatility and stagnant economic growth. Politics could become noisier and uncertainty rise. This is the growth and employment risk.”
Nedbank said to charge Gordhan with fraud would, if followed through, alter the course of the rand, and increase the chances of sovereign risk rating downgrades to speculative status and place renewed upward pressure on interest rates.
“Prior to this development, we expected another 25 basis point hike in January 2017, but much will now depend on how political developments impact on the country’s sovereign risk credit rating and the rand over the next few weeks.”
The charges against Gordhan came 15 days before he is due to deliver his medium-term budget policy statement.
Tumisho Grater, an economic strategist at Novare, said these developments would increase the probability of a possible downgrade later this year as they added to the political uncertainty that ratings agencies had been flagging.
“There are now also unanswered questions regarding whether Gordhan will be able to deliver the very important medium-term budget policy statement later this month,” Grater said.
“We now wait to see how the situation unfolds and if the uncertainty will cause a loss of confidence in South African assets, which may be reflected in the further weakening of the rand, higher bond yields and widening credit spreads.”
Peter Attard Montalto, an analyst at London-based Nomura, said ratings agencies would react to the news with emergency downgrades only on Gordhan’s actual exit occurring. “We still see S&P and Fitch more likely than not to downgrade on December 2 on lower growth and lack of structural reforms alone,” he said.
“Ultimately, we see the political and policy uncertainty continuing through to end-2017, holding back growth, job creation and especially domestic private sector investment, given Zuma’s exit seems highly unlikely and regardless of what occurs around the National Treasury.
However, clearly if today’s events turned into a reshuffle and a real degradation of the National Treasury as an institution, it would have much larger and longer-lasting negative impacts on the economy.”
Shaun Abrahams, the prosecutions chief, said Gordhan was still being investigated for his role in setting up a surveillance unit at the tax department a decade ago, which was suspected of spying on politicians, including President Jacob Zuma.
The elite police unit, the Hawks, first questioned Gordhan about that in February in an investigation that some analysts said was the result of political pressure from a faction allied to Zuma.
The president has denied the claims.
* With additional reporting by Reuters
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