A “containment strategy” from President Jacob Zuma and his supporters is a likely scenario in the coming weeks, emerging markets economist Peter Attard Montalto said on Friday.
In a statement to investors, he said this move will disempower Finance Minister Pravin Gordhan and the National Treasury and would have a negative impact on South Africa’s credit rating and potential economic growth.
The first move of the so-called containment strategy was Cabinet’s announcement some two weeks ago that Zuma himself would be heading up the state-owned enterprise (SOE) oversight committee, effectively sidelining Gordhan, said Montalto.
But the containment strategy could also include a Cabinet reshuffle, removing Gordhan and his deputy Mcebisi Jonas from the finance portfolio.
Plans to subject the banking sector to a judicial review, as mooted by Minister of Mineral Resources Mosebenzi Zwane, could also be viewed as part of the containment strategy.
The deputy finance minister controls key institutions like the Public Investment Corporation and the R1.8trn assets under the body’s control, as well as the Industrial Development Corporation (IDC), the government employees’ pension fund and the Development Bank of South Africa (DBSA).
“These institutions have key relationships with SOEs,” Montalto said.
However, a compromise solution is also possible, due to the amount of criticism SOEs received from Treasury, as well as legal constraints posed by the Public Finance Management Act.
The best outcome for South Africa and corporate foreign direct investment investors would be the continuation of a strong and capable National Treasury with Gordhan and Director General Lungisa Fuzile at the helm.
What’s different from Nenegate?
Montalto said the most popular question he has received from investors is how the current scenario (threats of Gordhan’s arrest by the Hawks and his removal as finance minister) differed from Nenegate, when former finance minister Nhlanhla Nene was summarily dismissed on December 9 last year.
“We believe much greater effort has been made now to create a richer and more complete, multifaceted (Cabinet) reshuffle narrative than was the case during Nenegate or indeed in the first half of this year.”
Montalto said the stakes are presently higher for Zuma in that there are deadlines around South African Airways. The national carrier is pressed for a financial guarantee and there is also the possibility of an early ANC elective conference.
There are also differences compared to Nenegate. “We have already seen a much fuller, faster multilateral approach to defending Pravin Gordhan as well as the National Treasury being much more aggressive against SOEs. This ratcheting up on both sides is why we think the end game may be approaching,” Montalto said.
How will it play out?
There is resistance to the onslaught on Gordhan from ANC ranks, said Montalto, “but so far the message from the ANC seems to have been somewhat lacklustre”.
The perceived war between Zuma and Gordhan is ongoing and will continue until one of the sides can land a decisive blow.
“Both President Zuma and Pravin Gordhan are now out of the country until Tuesday next week,” Montalto said. “It would seem difficult for anything to occur until everyone is in the country.”
A Gordhan exit would most likely lead to a rapid credit rating downgrade from Standard & Poor’s, with negative statements from Fitch and Moody’s.
“Then we would expect guarantees to be given to SAA (R5bn) and for Treasury to sign off on the nuclear procurement,” he added.
SOE debt ‘buyers strike’
News that FutureGrowth, South Africa’s largest local fixed income manager with R175bn assets under management, is halting lending to Eskom and four other SOEs could well reflect broader credit concerns, but Montalto believed it is unlikely that more debt buyers would follow suit if Gordhan still heads up Treasury.
“A scenario in which ‘PGxit’ (the removal of Gordhan) does occur, however, could well see greater stress for SOE funding. SOEs would look to banks (at a higher lending cost) and then to other public sector entities like the DBSA and IDC to plug funding gaps,” he said.
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