'Downward spiral' for SA if Gordhan is axed

Replacing Pravin Gordhan as finance minister with someone who is not seen to be committed to curbing spending, reforming state-owned companies and providing a platform for growth may condemn South Africa to junk status, economists have warned.

One economist even warned that the rand could be hammered to R30 to the US dollar.

The uncertainty over Gordhan's tenure, which intensified after news broke this week of the Hawks summoning him to answer questions about an alleged rogue unit set up at the South African Revenue Service when he was commissioner, has fuelled concerns that the country's credit rating could be downgraded to below investment grade.

This is backed by a Reuters poll in which 19 of 23 economists surveyed said the investigation of Gordhan posed a "significant" risk of a downgrade of South Africa's sovereign rating to speculative non-investment grade at S&P Global Ratings' December review.

The other four said the risk would be "marginally" significant.

The economists overwhelmingly expected that at least one agency would cut South Africa's rating to junk this year, with S&P seen as the most likely to do so.

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Two ratings agencies - S&P and Fitch - rank South Africa one notch above speculative grade. Moody's ranks it at two notches above investment grade, but has a negative outlook on the country.

The initial reaction in the markets to the Hawks summoning Gordhan was swift, with investors selling R2-billion worth of equities and R400-million worth of bonds on Wednesday and Thursday, after net purchases earlier in the week of R800-million and R2.8-billion respectively.

Annabel Bishop, chief economist at Investec, said on Friday a downgrade would raise the country's cost of borrowing and was likely to mean successive credit rating downgrades.

"The risk then is that a downward spiral develops, where higher borrowing costs and rising debt ratios of GDP result in a further deterioration in government finances, leading to sovereign debt default."

The implications of this scenario for the rand are severe.

Bishop said at worst the rand could weaken to R30/$ and R40 to the pound. Inflation would be substantially higher, jobs would be scarcer and basic necessities such as food would become unaffordable for some, Bishop said.

Ratings agencies have previously cautioned the government to keep political tensions in check.

Gardner Rusike, S&P lead analyst on South Africa, would not comment directly on this week' s developments. He said, however, that changes to leadership would result in a shift or slowdown in the current fiscal consolidation path. Stalling the momentum in economic reform "may be detrimental to economic growth and investor confidence".

Gordhan is driving fiscal consolidation - cutting expenditure and reducing debt - and economic reform in anticipation of the S&P review in November. The report will be issued in December.

Gordhan is expected to deliver the medium-term budget policy statement in October, when progress on fiscal discipline measures may be clearer.

He will also have to deliver positive messages about South Africa during an investor roadshow in the same month.

The investment climate in South Africa is already rocky.

block_quotes_start The fact that there is going to be this ongoing uncertainty is going to prevent the rand from appreciating in line with other emerging market currencies block_quotes_end

Daniel Silke, a political analyst, said uncertainty in political and fiscal stability sent mixed signals at a time when South Africa was attempting to encourage investment.

"These [mixed] signals are precisely what the ratings agencies said we should not do, which is tamper with and politically influence the Treasury. This puts further pressure on investors who will now fear that a downgrade is more likely come the end of the year."

The rand, which had gained in recent weeks, weakened by up to 5% to the dollar in the days after news broke on Tuesday that Gordhan had been summoned to appear before the Hawks.

But hawkish statements from the US Federal Reserve suggesting an interest rate hike this year also dampened sentiment towards emerging market currencies such as the rand in favour of the dollar in the past week.

Azar Jammine, chief economist at Econometrix, said: "I don't think it's a foregone conclusion that Gordhan will be removed.

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"But the fact that there is going to be this ongoing uncertainty is going to prevent the rand from appreciating in line with other emerging market currencies if sentiment towards them improve."

Jammine said six months ago the rand was 15% weaker than it currently is.

It is still stronger than it was when Nhlanhla Nene was fired from the finance minister post on December 9 last year.

"I don't see the rand returning to R13.20 to the dollar. It's likely to hover between R14 and R15 to the dollar in the short to medium term," he said.

Piotr Matys, a strategist at Rabobank, said: "In coming days comments from the Hawks will set the tone for the rand."

He said that "escalating concerns about Gordhan's future" could weaken the rand to the May low of R15.98.

"A strong message from any rating agency that it may cut ratings on the back of political woes," he said, would lead to a new "all-time" low for the rand against the dollar.

speckmana@sundaytimes.co.za