Playing With Knives: What does South Africa’s Cabinet Reshuffle Mean for the Country?

What happened?

At the fore of last Thursday night’s controversies was the President’s decision to sack Finance Minister Pravin Gordhan and his deputy Mcebisi Jonas.

For many the move was no surprise after the duo were called back from an investment roadshow in London on 27th March without much justification. Tension has been building between the Treasury and President Zuma, who has expressed frustration over the Treasury’s ‘embargo’ on his economic programmes.

In total twenty changes were made to the Cabinet with eight additional ministers and six additional deputies forced out the door while others were shuffled into new government functions. Less of a ‘reshuffle’ and more of a ‘purge’, many accuse the President of rooting out dissent and installing loyalists to the State’s highest offices.

For those watching South Africa since Zuma took office in 2009, the night will be reminiscent of a botched attempt to install a member of Zuma’s inner circle, David van Rooyen, to the Finance Ministry in December 2015 at the expense of then-Minister Nhlanhla Nene. The event, locally called ‘Nenegate’, culminated in Pravin Gordhan being asked to take over from little-known van Rooyen. This time, taking the helm from Gordhan and Jonas, are former Home Affairs Minister and Public Enterprises Minister, Malusi Gigaba, and former PRASA chair Sifiso Buthelezi.

Both figures hail from the embattled pro-Zuma camp, generating significant anxiety among many South Africans who decry their lack of financial experience and apparent proximity to the unpopular President. Since 2015, South Africans and the international community were largely at ease with Gordhan’s anti-corruption stance and comparatively conservative management of the Treasury.

It is hard to know if Zuma and his allies anticipated the scale of the immediate fallout from the decision and what may await them in the coming weeks and months. GRI takes a look at this fallout and what we can expect to unfold going forward.

 

Former South African Finance Minister, Pravin Gordhan (Source: Getty)

The markets

Gordhan was well-liked in the investment community and presided over what has been hailed as a highly transparent Treasury during his two tenures (since 2015 and previously between 2009 and 2014). His orthodoxy and relationship with the investment community has saved South Africa from several debt ratings downgrades and inspired more favourable economic predictions for the country. Since Monday, speculation would suggest a rocky few months ahead.

Moody’s re-evaluation of South African debt on April 7th will be the first real test of investor sentiment – it is all but certain we will see a downgrade from Baa2 to Baa3, one notch above junk status. Recent indications from ratings agencies has been that they are looking for institutional stability, fiscal discipline and indications of structural reform.

Now-incumbent Finance Minister Gigaba has directly tried to reassure markets, but has seemingly contradicted himself over the weekend by promising action within existing Treasury frameworks on the one hand, and “radical economic transformation” and expansion of public procurement activity on the other. Despite describing talks with ratings agencies as “cordial and robust”, only a miracle could avert a mid-year downgrade from both Fitch and S&P to junk status with a negative outlook. Expect higher borrowing costs across the board for State and citizens alike.

Even before the announcement, the Rand was on course for its worst week since Nenegate and ended Friday 7.8% down against the dollar at R13.40/$. As events continue to unfold we should expect to see further depreciation. For South African exporters this could offer a short term boost to sales, however indications from the Reserve Bank of South Africa suggest recent progress on tackling inflation (currently at 6.3%) could be quickly undone. Depending on how things play out, a hike in the current interest rate of 7% is entirely possible.

 

As downgrades roll in and the currency devalues, we should anticipate rising yields on government bonds; yields on 10-year debt jumped by 50 basis points on Friday to 8.83%. The Treasury also fell well below its target when auctioning inflation-linked debt on Friday, coming in at R230 million – the target was R650 million.

Despite this, it could present a buying opportunity for investors looking to snap up cheap and profitable South African debt. It will come as a relief to the new Treasury, but, again, could represent a short term gain.

This is unlikely to worry President Zuma who, after Nenegate, intensified rhetoric against the private sector and so-called ‘white monopoly capital’. His disdain for the private sector is well-documented, having lamented what he considers to be coercion from the markets.

The politics

In what has been decried as largely a formality, Zuma ‘consulted’ with his Top Six, the SACP and COSATU on the Monday ahead of his decision, finding limited support. Influential members of the governing ANC have publicly opposed the reshuffle in what has been an unprecedented break of support by several senior party members. Names include Deputy President Cyril Ramaphosa, ANC Treasurer-General Zweli Mkhize, ANC Secretary-General Gwede Mantashe and former-President Kgalema Motlanthe. The President has also faced backlash from the ANC’s historic allies, the South African Communist Party (SACP) and the Congress of South African Trade Unions (COSATU), which together form the Tripartite Alliance.

All have come forward to oppose the reshuffle and call for decisive action, and have also discredited the report at the centre of justifications for Pravin Gordhan’s dismissal. The report, which suggests Gordhan has conspired against the government in what has been termed ‘Operation Checkmate’, has found little affirmation.

 

South Africa’s President Jacob Zuma (Source: Getty)

What does this mean going forward? In December the ANC party conference will decide the party’s new leader and, effectively, the future President when South Africans go to the polls in 2019. Zuma has essentially anointed former AU Commission Chair, and ex-wife, Nkosazana Dlamini-Zuma, shoring up competition against his Deputy Cyril Ramaphosa.

The reshuffle could be a way of consolidating support for Zuma’s preferred successor, with the ANC Youth League and ANC Women’s League both endorsing her. However, the handling of this week’s events, as well as the possibility that Dlamini-Zuma could shield her ex-husband once in office, has made it difficult to secure a real power base within large sections of the ANC.

Ramaphosa, who has always kept Zuma at arm’s length, has called the Cabinet shake-up “unacceptable”; the message is likely to resonate with many ANC members and supporters, presenting a serious challenge to Dlamini-Zuma’s leadership. We should expect to see Zuma intensify rhetoric against his deputy in the coming months in an attempt to discredit him as a viable candidate.

That said, Finance Minister Gigaba’s talk of radical economic transformation is likely to help prop up Zuma’s political capital as it offers the ANC a boost among certain portions of the electorate it lost in August’s municipal elections (e.g. leftist youth organisations). This may help Zuma shore up support within the ANC ahead of December’s conference.

It is worth noting that all of this could be cut short by what will be a headline political development in the coming weeks: the spectre of a ‘Vote of No Confidence’. This weekend Parliament Speaker Baleka Mbete announced she would heavily consider raising a vote of no confidence in Parliament after the opposition DA and EFF lodged a motion this week. Her language suggests that it could very well happen; indeed, it has been entered parliamentary proceedings four other times in the past (as well as one attempt at impeachment).

The ANC, which has a comfortable parliamentary majority in South Africa’s 400-seat National Assembly, typically rallies to block the vote. For the first time, the prospect of a vote taking place and Zuma, along with his new Cabinet, having to resign is a very real one.

Just how likely this is is difficult to call. Despite senior ANC figures speaking out against Thursday’s events, the additional step required to rally opposition to his Presidency is a big one and has previously not been taken. For some, in particular Deputy President Ramaphosa, it could represent a great political gamble which, if successful, could pay off handsomely.

A silver lining?

Depending on what emerges from Zuma’s new Cabinet over the next few days, we could see markets reacting more favourably than one might predict. Given the predictability of the reshuffle for political commentators it is possible the instability has already been factored in. Signs of maintaining current policy trajectories would bode well with investment communities.

Similarly, the political calculations on part of the Presidency are unlikely to have been as short-sighted as they seem. There is little question the Zuma camp is already working tirelessly to reassure comrades in the ANC and position themselves well with traditional sympathisers. Whether this will be good enough will be clear in a matter of weeks.

Tags: anc, cabinet reshuffle, politics, south africa, zuma
Posted in Africa, Politics Risk, Politics Risk