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Gordhan knot

11 October 2016 By George Hay

South Africa is making the worst of a bad job. Like most emerging markets, Pretoria faces a challenge in preventing the foreign investors that hold 20 percent of its government debt from turning tail once the U.S. Federal Reserve raises rates. The last thing it needs is political drama. So it’s little surprise that the ramping-up on Oct. 11 of a campaign against Finance Minister Pravin Gordhan has pushed down the value of the rand, and investors’ spirits with it.

Gordhan, who just returned from flying the flag for the South African economy at the International Monetary Fund’s meeting in Washington, D.C., has been ordered to appear in court on Nov. 2. His suggested misdemeanor dates back a decade to when he headed the domestic revenue service and allegedly approved a favourable retirement package for a colleague. Although the state prosecutor denies political interference, President Jacob Zuma is on his third finance minister in less than a year. News of Gordhan’s predicament sent South Africa’s currency down 3.8 percent against the U.S. dollar.

The timing is unfortunate, to say the least. Gordhan is due on Oct. 26 to deliver a medium-term budget statement, which will be crucial to pacifying providers of capital. Even without the threat of rising rates, South Africa’s economy has multiple challenges: unemployment exceeds 25 percent, inflation is above the 6 percent forecast and real GDP is likely to hardly grow this year. The big danger is that Gordhan gets sidelined, and a replacement gets parachuted in who is less focused on fiscal discipline.

All three main ratings agencies are pondering whether to downgrade South African bonds to junk, as happened in recent weeks to fellow emerging market Turkey. Foreign investors have significantly increased their holdings of South African government bonds since the start of the year, according to Morgan Stanley. If they turn tail, the risk is that bank borrowing costs and inflation rise and the economy’s 1.1 percent growth due in 2017 is even weaker. For a troubled economy with debt at 50 percent of GDP, that’s not a great place to be.


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