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It seems inevitable that Pravin Gordhan will be ousted as finance minister. Claire Bisseker and Natasha Marrian look at the implications — and the machinations inside the ANC.

WHAT IT MEANS: Cut  to junk could be immediate if finance minister is sacked. Zuma  allies say Gordhan used treasury to probe president and his benefactors.

Rating agencies could cut SA’s credit rating immediately rather than wait until their scheduled reviews later this year if finance minister Pravin Gordhan is axed following the revival of the Hawks’ case against him.

The case is linked to the so-called "rogue spy unit" within the SA Revenue Service (Sars), which was formed under Gordhan’s watch as tax commissioner to investigate high-profile tax dodging.

S&P Global Ratings has confirmed to the Financial Mail that if Gordhan is forced out, it would not necessarily have to give his replacement time to prove his or her commitment to fiscal discipline or economic reform before acting.

"We would assess the reasons for the change and the intentions behind it and draw our own conclusions," says S&P associate director for sovereign ratings, Gardner Rusike.

With S&P having ranked SA’s foreign currency rating "BBB-" on the bottom rung of the investment grade ladder with a "negative" outlook, a further notch downgrade would cut SA to junk status.

"There is now a potential scenario in which SA’s sovereign debt gets downgraded early, the rand continues to slide, inflation forecasts are revised up and the Reserve Bank resumes raising interest rates, having little choice in the absence of sufficient capital inflows," says Sanlam Investment Management economist Arthur Kamp.

"If so, it is not too many steps towards outright recession."

In fact, SA can expect to experience a recession that will last almost two years, according to studies on the economic fall-out that occurred in six of SA’s peer countries that have been downgraded to junk status in the past decade.

"The risk then is that a downward spiral develops, where higher borrowing costs, and rising fiscal debt ratios to GDP result in a further deterioration in government finances, leading to the extreme case of a sovereign debt default," warns Investec economist Annabel Bishop. In such a situation, she says, the rand would probably move towards a range between R30/US$ and R40/US$.

As this message has sunk in — that SA’s economic future is being gambled away by shady forces bent on self-enrichment — academics, business and civil society organisations, retired judges and ANC veterans have responded with mounting distress.

"It’s time for real leaders in the national executive committee, the cabinet and in the SA Communist Party and Cosatu to stand up to the tyrannical and despotic behaviour on display here because yet again we stand on the edge of an economic precipice," warned almost 60 academic economists last week in an open letter to President Jacob Zuma.

In May and June, SA pulled back from that precipice when all three main credit rating agencies affirmed the country’s ratings, contrary to expectations that cuts were on the cards.

Fitch has SA on the same notch as S&P but with a "stable" outlook. Moody’s has SA ranked one notch above S&P and Fitch, though its ratings outlook is "negative".

That all three agencies held their ratings steady was largely credited to Gordhan and the nascent reform movement, "Team SA", which he’s cultivated in solidarity with business, selling the message that SA was reforming — even if the evidence was less than compelling.

Over the past three months, that veneer of progress has been wearing thin as Zuma has stonewalled reforms to state-owned enterprises. The SABC and SAA have lurched from one crisis to another while bleeding cash and any remaining shred of credibility.

In fact, the very real possibility that Gordhan is prepared to let SAA go to the wall (without a new government guarantee SAA’s planes may be grounded this month) could explain the revival of the Hawks’ apparently flimsy case against him.

Since February, the Hawks have been questioning Gordhan aggressively about the "rogue unit" which allegedly employed illegal surveillance while investigating tax fraud. When Gordhan hit back and publicly accused the Hawks, under Zuma loyalist Berning Ntlemeza, of subverting the law and acting with ulterior motives, they backed off and denied that he was a suspect in the case — until last week.

Again Gordhan took his case public, releasing his lawyers’ detailed counter- arguments to these allegations, enabling the public (and rating agencies) to draw their own conclusions.

It seems inevitable that Gordhan will be charged and removed as finance minister in a cabinet reshuffle, possibly this week.

If the Hawks don’t charge Gordhan now, having harassed him all year, it will suggest that they know they have no case and the charges were politically motivated all along.

The battle around Gordhan has become entwined with the fight raging within the ANC as it looks ahead to its next elective conference, in 2017.

At stake is nothing less than control of the party and the state beyond Zuma’s term of office. He is expected to step down as ANC president in December next year.

Gordhan is quickly becoming a rallying point for all of those opposed to Zuma, for the brazen attempt to oust the finance minister represents nothing less than a move to hollow out the few remaining state institutions that stand in the way of the "Zanufication" of the ANC and SA becoming an outright kleptocracy.

High-ranking ANC insiders aligned to the president complain that Gordhan has used national treasury and the Reserve Bank to "investigate" Zuma and those close to him. Treasury’s investigation into Eskom’s coal deals with Gupta-aligned firms is cited as an example.

Zuma already has control of SA’s security apparatus — the Hawks, intelligence, the police and the National Prosecuting Authority. The methods used to undermine treasury mirror events that have unfolded in the security cluster over the past decade.

Should Gordhan be removed, the Public Investment Corp as well as the Reserve Bank could easily be targeted next.

Gordhan reportedly told treasury staff on Friday that he would rather die than have the country handed over to "thieves". Referring to this, ANC deputy secretary-general Jessie Duarte said in an interview with the Gupta-owned ANN7 news channel this week that if Gordhan believed people were thieves, they should be investigated and charged.

If Gordhan is innocent, she said, let him co-operate with the Hawks and answer to the probe instead of portraying himself as above the law.

Treasury was under the control of established white business, she added. This had been achieved through the appointment of ministers from its "ranks". She cited the example of former finance minister Trevor Manuel, saying he came from the Mobil oil company and was trusted by big business.

"The issue we must face is that it is incorrect for business [and] the banks to wish to determine who the minister of finance is in this country ... This is a matter which the ANC needs to clarify with the captains of industry," she said.

Duarte also took a swipe at the Reserve Bank, saying it was not doing enough to cushion the rand but that it was privately owned and that was "a difficulty".

"We presume, and hope, that this was a one-off statement rather than the start of a sustained attack on the Bank," says Rand Merchant Bank currency strategist John Cairns. He notes that the political risk premium in the rand has continued to climb this week, as evidenced in continued rand underperformance relative to other risk currencies.

Within the ANC, there are two views: those of the Zuma camp, reflected by Duarte, and that of the opposing group articulated over the weekend by the SA Communist Party (SACP).

The SACP alleges that the pursuit of Gordhan is an attempt to use judicial means to achieve political ends. Deputy general secretary Jeremy Cronin has intimated that Zuma is too powerful in the ANC’s national executive committee (NEC) and in the cabinet.

Other insiders opposed to Zuma have complained that he generally has the last word in the NEC, neutering collective decision-making which the ANC has long prided itself on.

But the sudden desperation around the Gordhan matter could be an indicator that Zuma is quickly losing his grip in the ANC.

This was heightened by the party’s share of the vote falling from 62% to 54% in the 2016 municipal elections.

While the faction aligned to him still holds the numerical advantage, it has become increasingly apparent that this group — which includes the ANC chairmen of the North West, Mpumalanga, Free State and KwaZulu Natal provinces — is also divided.

In addition, a large number of the party’s leaders who sit on the NEC and are part of Zuma’s cabinet have fallen out with his faction and are now on the fringes.

Until last week, the markets had become increasingly sanguine about SA’s prospects — given the slight improvement in domestic fundamentals, a more constructive global environment as well as evidence of greater pluralism in SA politics following the local government election.

"Before this week’s Gordhan saga, a combination of a stronger rand, strong capital inflows and tentative signs of stability in the supply side of the economy resulted in financial markets becoming too complacent over the still significant degree of political risk in SA, which was still bubbling away in the background," says Jeff Schultz, an economist at BNP Paribas Securities.

Indeed, BNP’s model shows that the market pricing of a ratings downgrade by year-end in SA had slipped to around 50% in recent weeks, from odds of 65% that prevailed in June (see graph).

Over the past week, the rand has lost around R1 against the dollar as the markets have battled to digest the Machiavellian moves against Gordhan.

However, the markets’ pricing of a downgrade has hardly moved, suggesting this risk is still being underpriced and the rand could fall a lot further given the real prospect of Gordhan’s axing.

"In the event of the finance minister stepping aside and/or being forced out, we think this would lay the grounds for an almost immediate downgrade of the sovereign from rating agencies," says Schultz.

"The market reaction would be severe, given perceptions of the political motivation behind the Hawks’ charges," agrees Standard Chartered’s chief economist Razia Khan. "It is unlikely that the ratings agencies would be able to justify holding the rating until a scheduled review."

But even if there is no immediate action against the finance minister, the damage to SA’s institutional strength has begun, she adds. "Uncertainty will definitely have some impact on markets, complicating the task of economic recovery."

It is not as if the rating agencies didn’t see this coming. In June, Fitch and S&P remained sceptical that the Team SA initiative would do much to accelerate growth and were concerned that political contestation would continue to undermine progress.

"In our June statement we highlighted the importance of fiscal consolidation, economic reforms and holding political tensions in check in affirming the ratings at the current investment grade levels," says Rusike.

He adds that the reform momentum is specifically associated with Gordhan and that should it slow down this would be bad for economic growth and investor confidence. The increasing political tension could also weaken the social contract with business and labour.

The agencies’ stay of execution in June was really about recognising Gordhan’s reform efforts and giving them time to show results. Instead, the Hawks have turned the dial back to just before 9/12 (Nhlanhla Nene’s axing). Should those events be repeated, there will be no more second chances.