Finance Minister Gordhan replaced at a time of Weak Growth
President Jacob Zuma on Thursday dismissed respected finance minister Pravin Gordhan and deputy Mcebisi Jonas as part of a major Cabinet reshuffle — a move that has tumbled South Africa's markets and currency.
Gordhan was replaced with Home Affairs head Malusi Gigaba.
Political worries are once again nibbling at the South African rand, after President Zuma’s latest unorthodox government appointment raised investor fears that he could try to unseat the country’s internationally-respected finance minister.
Zuma said he made the changes “to improve efficiency and effectiveness”.
The changes bring younger MPs and more women into the National Executive “to benefit from their energy, experience, and expertise”, said Zuma.
Economic worries
Peter Attard Montalto, Nomura analyst, adds the market will struggle to digest Gigaba. “Someone who has been effective at home affairs but is clearly being put in a role to do a particular job by Zuma and viewed as loyal to Zuma. Similarly with Buthalezi.”
MMI economist Sanisha Packirisamy adds Gordhan and Jonas’ removal will be a key concern to markets. “In their previous capacity, they had played a crucial role in improving SA’s fiscal position and had put in place measures to curb corruption. They had also opposed unaffordable projects, such as the procurement of a nuclear fleet deemed to be unnecessary according to the latest Integrated Resource Plan, based on more realistic domestic growth assumptions.”
Packirisamy adds rand volatility is expected to remain high given the unpredictable moves in SA’s political setting currently.
“At its worst point, the rand sold off against the US dollar by over 6 percent relative to its firmest point the afternoon prior to the cabinet reshuffle, but it remains stronger than levels seen at the beginning of the year.”
Cronje notes the new ministers, who will be sworn in at 6pm on Friday, come in at a time of very weak economic performance as debt levels have increased, the budget deficit remains under pressure, and the government's tax take as a proportion of gross domestic product is projected to reach a record level.
“The government also knows that ratings agencies and investors are watching its next moves closely and it will be interesting to see how the government now responds to investor concerns.”
Cronje adds the Institute expects Zuma's political enemies to launch a ferocious fight back over the next year. “This is far from the end of infighting and uncertainty in the government and the ANC – quite a number of years of instability may lie ahead.”
Packirisamy notes rating agencies will be evaluating SA shortly, Moody’s by April 7 and S&P on June 2. “A downgrade to sub-investment grade status would likely have a negative effect on SA’s near and longer-term economic outlook.”
Ratings Agency
Fitch has reacted to Zuma's Cabinet reshuffle, saying it signals a change in policy direction and will raise political tensions within the African National Congress (ANC) and its traditional allies, potentially weakening public finances and standards of governance.
The ratings agency is warning the move will increase political instability as the party focuses on its policy conference in June and leadership contest in December.
Continued political instability that adversely affects standards of governance, the economy or public finances, was one of the ratings sensitivities Fitch highlighted in November when it revised the outlook on South Africa’s BBB- rating to negative from stable.
The Rand Currency
The rand continued its free fall against major currencies on Friday morning as the nation awoke to the news that Gordhan had been axed.
In a fall reminiscent of that witnessed in the wake of Nenegate in December 2015‚ when Zuma replaced then finance minister Nhlanhla Nene with the relatively unknown Des van Rooyen‚ the rand plummeted overnight‚ losing almost 3% against the dollar‚ pound and euro in opening trade.
The local currency reached intraday worst levels of R13.6282 to the dollar‚ R14.5501 against the euro and R17.0017 against the pound before managing to claw back some of the losses.
At 8.16am‚ the rand was at R13.4656 to the dollar from an overnight close of R13.2644. It was at R14.3850 against the euro from R14.1566 previously and at R16.7961 against the pound from R16.5395.