16 December 2015

Third time lucky, Zuma?


South Africa was the pin-up of democratic triumph in 2000. Economic inequality between the racially segregated whites and blacks rapidly disappeared and investment in education, health and social protection doubled. Despite the fact that economic inequality had merely shifted within races, meaning today, pre-tax economic inequality is as high as it was 20 years ago (also the world’s highest), democracy was doing good.

And yet now, a downward spiral of populism and declining economic performance is looming.

South Africa’s President Jacob Zuma has appointed his third finance minister within a week in an embarrassing political blunder.

Previous Finance Minister Nhlanhla Nene was sacked last week after he increasingly lead the Treasury to block Zuma’s financially inviable projects. These included plans to build a nuclear power plant and allowing South African Airways, the loss-making national airline, to rearrange an aircraft leasing deal.

Nene was replaced by an obscure parliamentarian, David van Rooyen who had no experience in finance or national government, only municipal government affairs. This was despite warnings from Fitch and Standard&Poor that Nene was bolstering what credit rating South Africa was still enjoying.

During a period of ugly economic stagnation, declining world prices for South Africa’s commodity exports (nearly 20% of its exports are gold) and successive political scandals, Mr Nene had acted as a bulwark against the increasingly populist inclinations of Mr Zuma and the ruling party, African National Congress (ANC).

Sure enough, when he was replaced by van Rooyen, the rand fell to a record low and the stock market plummeted: the rand plunged by about 9.5% in the two days after the announcement of Mr Nene’s dismissal, while the yield on South Africa’s benchmark 2026 bond has jumped from 8.75% to 10.38% since Wednesday.

Van Rooyen lasted in the post for 4 days. In a desperate attempt to back-pedal on the week’s economic damages, Zuma has re-appointed the experienced Pravin Gordhan as ANC’s finance minister on Monday.

Having been finance minister from 2009-2014, Gordhan’s re-appointment is designed to quell market discontent and restore some confidence. Luckily, it appears to be having some immediate effect with the currency rising, recovering from just over 16 rand to the dollar to about 15 by Monday morning.

Now, the bad news. Standard&Poor has cut its outlook for South Africa from stable to negative and there is real risk that the country’s credit rating could be graded as junk for the first time since 2000. The Treasury, once one of the nation’s most highly regarded institutions, seems to have fallen foul of political meddling and corruption. The only remedy to South Africa’s increasing cost of borrowing (national debt has risen sharply to fractionally under 50% of GDP in recent years even under the tight rein of Mr Nene, already costing more than the education budget to service) could soon be a loan from the International Monetary Fund, however unpalatable to Mr Zuma.

The entire episode has also begged the question of what on earth is happening with the governing ANC? The ANC leadership was not consulted in either of Zuma’s decisions and seem to be hearing about the drama at the same time as the rest of us.

This is potentially a good thing for the ANC in that it distances them from this blunder, and Zuma will alone take the full responsibility for any economic repercussions. The party shouldn’t lost any votes in the medium term, since public loyalty is to the liberation movement – which ended the apartheid regime – not the man himself.

But equally, it shows appalling solidarity and disorganisation within the party. High profile ANC members opposed Mr Nene’s removal including former Health Minister Barbara Hogan who on Friday called on Mr Zuma to resign, stating that the President had crossed a line for which he needed to be held to account. It does not reflect well on the ruling party as a coherent body.

Even more worrying is that the government might be tempted to veer towards the largest minority party, the Economic Freedom Fighters, in an attempt to regain lost populist support. This is the party founded by the expelled ANC youth leader, the racially divisive and incendiary Julius Malema, whose economic prowess amounted to a US$4m  corruption charge. For perspective: it was in June 2013 that Malema, almost admirably, appealed for donations to found the EFF whilst he was on trial for his first money laundering case. And yet he continues to rally support amongst the youth and the unions.

The saga is a severe embarrassment for Zuma and South Africa, which is one of the world’s most traded and liquid emerging markets, and will only add fuel to the firepit of concerns about the quality of leadership.

South Africa’s economy is now expected to struggle to grow much beyond 1% this year and next, while any potential US interest rate rise will only put more pressure on the weakened rand.

It is normally the case that democracy does not die a sudden, clearly isolated death. It dies a number of small deaths that eventually lead to its collapse. Zuma has had a good go at breaking the norm.

With the next general election not until 2018, the interesting question now is how many more incidents until the ANC does something about Zuma?

Olivia Archdeacon is Assistant Editor at CapX