Analysis: South Africa after the downgrade

Can the relatively unknown new finance minister Malusi Gigaba steer the economy through its biggest crisis in years?


Held amid the monuments and parks of Washington DC, the spring meetings of the IMF and the World Bank are a chance for finance ministers to engage in genteel discussions on the progress of the global economy while enjoying a round or two of high-level hospitality.

Yet for South Africa’s Malusi Gigaba, the country’s fourth finance minister in less than two years, April’s events were the sideshow to a far more critical stateside meeting. Flying with a delegation of advisors from his newly acquired Treasury, Gigaba sought an urgent meeting with ratings agency Moody’s in a desperate bid to ward off yet another downgrade to junk status.

For many, Gigaba’s lunge for fiscal credibility was indicative of an administration mired in economic doublethink. Having thoroughly disregarded the views of the ratings agencies by sacking the internationally respected Pravin Gordhan in March – leading to a downgrade to junk status by S&P and Fitch – analysts are left wondering whether President Jacob Zuma’s new attempt to woo Moody’s represents anything more than a cynical damage limitation exercise.

“We know Gordhan’s gone but the implications of that for policy going forward are very unclear,” says John Ashbourne, Africa economist at Capital Economics. “Gigaba has been trying to use two lines to different audiences – telling rating agencies that nothing will change and that he’s maintaining the same spending targets as Gordhan, and telling local media he’s going to radically transform the economy. No one thinks it’s possible to do those things at once.”

Amid these conflicting messages and against the backdrop of a stagnant economy and plummeting rand, investors are closely scrutinising the background of the new finance minister to seek clues as to his elusive economic views. A former minister of Home Affairs and Public Enterprises with thin economic experience, the 45-year old lifelong member of the African National Congress (ANC) is regarded, first and foremost, as a party man and a Zuma loyalist who will be prepared to toe the line of his patron.

As a result, few anticipate a resumption of the fierce independence that marked Gordhan’s time at the Treasury, which included robust scrutiny of state-owned enterprises, a deep scepticism of costly prestige projects and frequent tension with an impatient president. Early indications suggest that Gigaba will seek to push ahead with a multi-billion rand nuclear programme that was repeatedly held up by Gordhan on cost grounds, although he insists it will run at a “pace and scale the country can afford”. Yet that statement alone is unlikely to dispel the notion that Gigaba remains unhealthily close to the president. 

Lack of credibility

“The problem is that the current finance minister just doesn’t have the credibility,” says independent political analyst Ralph Mathekga. “The president wants people who are not going to give him problems when he implements projects that are key, either to his political survival or to his increasing hold on South Africa’s state.”

While Gigaba’s appointment may appear to open the door to increased presidential control over the Treasury purse strings, opinion remains divided on whether he will push for the “radical economic transformation” long sought by figures on the left of the ANC and increasingly promoted by members of the president’s inner circle as a response to tepid growth and unemployment running at 26.5%.

Such a policy shift, if enacted, would represent the most substantial deviation yet from the market-friendly path that Zuma and his predecessors have pursued since the country’s emergence from apartheid. While a full-blooded pitch for the nationalisation of the country’s mines and banks – as laid out in the ANC’s 1955 Freedom Charter – appears highly unlikely, steps away from the centrist consensus championed by Gordhan could be imminent. 

“The order of priorities will be first undoing procurement blockages and promoting empowerment and transformation. It will not be to adjust fiscal policy or nationalise anything… over time we are going to see the Treasury standing up less for ‘neoliberalism’ and the banks and going more with the rationale of radical economic transformation,” says Peter Attard Montalto, head of emerging EMEA economics at Nomura.

The question remains whether Gigaba can keep the markets onside while allowing for the greater fiscal flexibility demanded by the president. In April, Gigaba surprised market participants by committing himself to Gordhan’s 2017 budget goals, including a bid to stabilise government net debt to 50% of GDP over the next three years. Given that pledge, any apparent shift towards a “radical” economic strategy could merely be a substance-free attempt by the ANC to outflank its domestic opponents – particularly the leftist, pro-nationalisation Economic Freedom Fighters.

“Radical economic transformation is undefined and vague – you promise something that everyone can project their hopes into. The play here could be that Zuma has tried to position the ANC on the further left because it’s being hit by the ANC in rural areas. Option B is that he’s preparing for a coalition with the EFF,” says Co-Pierre Georg, senior lecturer at the African Institute of Financial Markets and Risk Management at the University of Cape Town. 

Even if radical economic transformation is the ultimate goal, the government may lack the capacity to implement it in any meaningful sense. Modest attempts at mining and land reform have come to little on Zuma’s watch, as exemplified by the protracted process of drawing up a Mining Charter on increased black ownership.

There are also signs that experienced civil servants are plotting their exit from the Treasury in the wake of Gordhan’s summary dismissal. Treasury director general Lungisa Fuzile is among those to call time on his career after two decades’ service, raising the spectre of institutional inertia.  

“The lingering issue that hasn’t been dealt with is the questions of the capacity of the state to undertake radical policies. I’m referring to the ability of the bureaucracy day to day and the capacity you need within government to undertake this kind of radical shift – you need departments that are well placed to implement policies,” says Mathekga.

Just a bid for control?

Given the Treasury’s contradictory policy and the example of other hollowed-out government departments stacked with ANC placemen, there is every indication that Zuma’s bid to control the Treasury remains less about a radical new economic vision and more about solidifying his grasp on the party machinery. 

Beset by allegations of cronyism over his links to the Guptas – an Indian business family who Gigaba says he has also met – analysts say Zuma is keen to handpick former wife Nkosazana Dlamini-Zuma as his successor at the party’s December conference in order to ensure a smooth transition. With the ANC alliance increasingly frayed – its long-term ally, the Congress of South African Trade Unions (COSATU) called for Zuma to go in April – the president’s bid for party control has taken on a renewed urgency.

The concern for investors remains that the genuine economic transformation required to boost forecast growth of just 1.3% and get to grips with rampant unemployment will play second fiddle to the president’s politicking.

“We see South Africa in a cycle now of reinforcing the status quo, a path it is already on of low growth, rising inequality, rising unemployment, high rent extraction, eroding institutions and slowly rising debt to GDP,” says Nomura’s Montalto. 

David Thomas


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