Investor fears are mounting that South African Finance Minister Pravin Gordhan’s job is in jeopardy as he engages in a public feud with police investigators over their probe into the national tax agency.
Gordhan’s departure could spell disaster for an economy threatened with recession and on the brink of having its credit rating downgraded to junk. President Jacob Zuma reappointed Gordhan in December as finance minister, a post he had held from 2009 to 2014, to help rebuild investor confidence damaged by Zuma’s decision to fire Nhlanhla Nene and replace him with a little-known lawmaker.
“It’s a cause for concern,” Rune Hejrskov, who helps manage about $1.3 billion at Jyske Bank AS in Silkeborg, Denmark, said by phone. “Absolutely, we’re pricing South Africa with the possibility that Gordhan may not stay in his job.”
The Directorate for Priority Crime Investigation, a police unit known as the Hawks, on Tuesday said Gordhan (66) missed two deadlines to answer questions relating to the tax agency that he led before 2009 and indicated it will force him to comply. Gordhan has described the Hawks’ statements as “threatening” and as harassment, while Zuma has said the probe should go ahead.
The rand breached 16 to the dollar level for the first time since February after the Hawks statement, dropping 2.5 percent on Tuesday, while yields on the rand bonds due 2026 surged 28 basis points to 9.42 percent. The currency was 0.2 percent weaker at 15.9492 by 7:22 a.m. in Johannesburg on Wednesday.
“What they are doing is to immediately undermine his credibility in the eyes of the international community by trying to make him out as a criminal,” George Herman, who manages the equivalent of $2.8 billion as head of South African investments at Citadel Investment Services, said by phone from Cape Town. “I don’t understand the agenda behind this. It is a ‘cut-your-nose- to-spite-your-face’ strategy.”
The public spat between Gordhan and the police comes a week after he met with investors during an international roadshow to the UK and US to allay fears of a credit-rating downgrade. Standard & Poor’s has a negative outlook on its BBB- rating, one level above junk. Moody’s Investors Service, which rates South Africa’s debt one notch higher, put the nation on review last week for a cut.
“The market is doubting how much support Gordhan has from his government,” Vivienne Taberer, a fund manager at Investec Asset Management in Cape Town, said by phone. “The price action is telling you that it’s not clear that he’s got the support. If he does leave, you’ll certainly see the rand a lot weaker than this.”
For much of his three months in office Gordhan has sought to convince investors the government will stick to fiscal prudence by curbing spending and keeping debt under control. That pledge is made harder by a weakening economy that’s set to grow less than 1 percent this year.
Gordhan will probably retain his post because he has powerful backers within the ruling African National Congress, said Wayne McCurrie, a money-manager at Momentum Asset Management in Johannesburg.
“If Gordhan lost his job, it would be completely chaotic,” he said. “It would wreak complete chaos on the markets.” – Bloomberg