Widespread protests erupted in South Africa after president Jacob Zuma made substantial changes to his cabinet on March 27th, including replacing Pravin Gordhan, the experienced and respected finance minister. Many South Africans fear that by appointing loyalists to his cabinet, corruption and cronyism under Mr. Zuma’s leadership will flourish.

…to prison!

Rating agencies S&P and Fitch cut South Africa’s creditworthiness from investment grade to junk in a direct response to the sacking of Mr. Gordhan. Mr. Gordhan’s fate was sealed after he went against vested interests to curb waste and corruption at state companies. Notable cases included a shady coal purchasing contract entered by Eskom, the electricity grid, with a mining company owned by the Gupta brothers and the debt mountain incurred by SAA, the national airline mismanaged by Dudu Myeni. Both the Guptas and Ms. Myeni are close to Mr. Zuma: the Guptas are even believed to have had a hand in hiring and firing of cabinet ministers, for example. The Treasury forced Eskom to cancel the coal contract and instead put up the contract for open tender, whereas SAA’s management was reshuffled and a new turnaround strategy and capital injection discussed. The Treasury was also at odds with the government on the costly procurement of nuclear power capacity.

Mr. Gordhan was appointed in December 2015 after Mr. Zuma removed Nhlanhla Nene on similar grounds (i.e. being uncooperative with Zuma’s cronies). At that time, Mr. Zuma tried to appoint a pliant, inexperienced person to the post but was forced to turn to Gordhan after a run on the rand, downgrade warnings from credit rating agencies and opposition from within Zuma’s political party, the African National Congress (ANC). It was clear that the relationship between Messrs. Zuma and Gordhan was strained from the beginning. Initially, Zuma sought to remove Gordhan by asking the Hawks, a special police unit, to investigate alleged improper behavior at the time when Gordhan was heading the tax office. However, no criminal charges were made and Mr. Gordhan persevered. Apparently, Zuma believes his control over the ANC now is strong enough to have another try to populate the Treasury with pliant figures whereas an investment grade rating supposedly can be dispensed with. The appointment of two loyalists, Malusi Gigaba as finance minister and Sfiso Buthelezi as head of treasury, signals the increasing risk of patronage and corruption, both being blessed with a reputation of having greased palms.

Support for the ANC, in power since the end of apartheid in 1994, has been softening in the last year or so. For example, the ANC dropped below 60% of the vote in local elections in August of last year (to 53.9%). Under Zuma’s leadership, divisions within the ANC have intensified. Some ANC stalwarts, including Cyril Ramaphosa, the deputy president, openly questioned Zuma’s leadership. Long-time ANC allies, the Congress of South African Trade Unions (COSATU) and the Communist Party, called for Zuma to step down and joined in the street protests. In December, the ANC will choose its new leaders. The winner most likely will be ANC’s next presidential candidate in 2019. Zuma hopes his ex-wife Nkosazana Dlamini-Zuma will succeed him (so she can keep him out of prison).

Opposition parties, led by the Democratic Alliance, have tabled a motion of no-confidence in parliament. If adopted, this effectively means that Zuma would have to step down. However, the vote would require the backing of at least 50 ANC members (20% of the ANC representation) and the entire opposition. Most political commentators think it is unlikely that ANC members would openly support the opposition. Thus, the opposition parties have postponed the vote to ask the constitutional court to consider whether a secret ballot should be held (hoping to gain more ANC votes this way).

Meanwhile, South Africa’s economy is in a deep slump. Real GDP growth in 2016 was only 0.3% (not enough to match population growth of about 1%) on the back of low commodity prices, poor infrastructure (especially in electricity and transportation) and labour strikes. Gross public debt increased to 51.9% of GDP as the fiscal deficit reached 3.6% of GDP (although the primary balance is expected to come in at only -0.2%). The current account was also in deficit by -4.1% of GDP although saw a substantial improvement in 4Q16 on higher commodity exports. Unemployment has remained stubbornly high at 26% as job creation is held back by poor (vocational) education and by collectively agreed wages agreed with large companies and applied to the whole sector (i.e. including SMEs that may not be able to pay high wages). For 2017, GDP growth was forecasted to rebound at 1.0% to 1.5%, driven by household consumption and investment (spurred by fewer power black-outs and higher commodity prices). Of course, the new reality is that political uncertainty has yet again raised its ugly head, denting business confidence and, hence, investments. Mr. Gigaba helpfully announced a plan for a “radical socio-economic transformation”, which – he says – means using state resources to increase black ownership of the economy (“black empowerment”) and to redistribute land. In practice, we think the plan will result in uncontrolled, inefficient spending and cronyism. It certainly will not help to make South African enterprises more competitive, in our view. This does not seem to be a great approach to sway international investors to back South Africa’s economy.

Saviour of the Rainbow Nation…?

We think that South Africa’s economic growth will remain moribund whilst the government’s balance sheet will further deteriorate. In the run-up to the ANC elections in December, Jacob Zuma will be busy bribing his fellow ANC members to muster support to serve out his term until the general election in 2019. Maybe by that time more people may have had enough of corruption and cronyism and decide to turn their backs on Zuma’s ANC. Until then, we think the Rainbow Nation is stuck in a political quagmire with little hope for economic recovery. No pot of gold to be found here…