South Africa Politics To Trigger Downgrade

Political Risk Rising

Investors have been buying the South African rand in recent weeks, clearly overlooking political risk that for months has been simmering and is now finally boiling over. The heightened risks are now more than likely to “cement a downgrade to sub-investment grade”. In Part 1 of our series, we take a look at the political chaos of a country that was once a darling of the emerging markets.

Recent reports suggest South African Finance Minister Pravin Gordhan is now facing criminal charges. He been has summoned to appear in court on November 2 to face fraud charges, all stemming from his first stint as the country’s Finance Minister. The matter, sources say, relates to his final approval of the retirement and eventual reappointment of a former colleague that allegedly led to “fruitless” expenditures of ZAR1.1 million, roughly $77,000.

The head of the National Prosecuting Authority has stated  that there has been no political interference in the current matter, but consensus stands and the belief is that most investors see President Zuma’s fingerprints on this. Earlier this year, Gordhan was reportedly close to being charged on corruption charges stemming from his time as head of the South African Revenue Service. And according to local press in South Africa, this issue remains alive.

“This latest twist is just part of the ongoing split between Gordhan and Zuma,” Win Thin, global head of emerging market currency strategy with Brown Brothers Harriman (BBH) wrote in a note to clients this week.

In addition, running parallel to the recent Gordhan developments is the ongoing Gupta saga. President Zuma has been consistently linked to the influential Gupta family. Indeed, there are some who believe that Zuma purposely turns up the heat on Gordhan anytime that the spotlight shines on the Guptas. This month, the country’s Public Protector Thuli Madonsela questioned Zuma in relation to her investigation into whether the Guptas exerted “undue influence” over government affairs.

South African Finance Minister Pravin Gordhan.

It is important to note Zuma has faced many political challenges, and multiple corruption scandals in the past. And he continues prevail. This time is probably no different, as there does not seem to be anyone strong enough to challenge his leadership of the ruling ANC. Zuma, by law, cannot run for office again so a new leader will be chosen at the party summit in December 2017. “That choice will set the tone for the party in the post-Zuma period.  Populist or pragmatic? Only time will tell,” Thin said.

BBH and other market analysts believe that the ANC’s losses in the recent local and municipal elections have serious implications for policy. At 53.9%, the ANC’s support is the lowest it has been in the country’s post-apartheid period. “Our base case is that the ANC will lean more populist ahead of the 2019 general elections, in an effort to buy back popular support.”

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