The South African economy has been plunged into uncertainty after Pravin Gordhan, the country’s embattled finance minister, was this morning charged with fraud and summoned to appear before prosecutors.
The dramatic move, which could have severe implications for the country’s credit rating, is the culmination of a legal campaign against the respected ANC veteran and follows allegations that he set up a spying unit while leading the country’s tax agency. The rand promptly dropped by over 3.5% against the dollar as market watchers reacted negatively to his arrest.
In a press conference, Shaun Abrahams, national director of public prosecutions, alleged that Gordhan had fraudulently approved an early pension payment to a South African Revenue Service employee. He added that an investigation was ongoing into the alleged spying unit, which, while legal, had acted in a “strange and covert manner” in defiance of the country’s constitution.
Gordhan has repeatedly dismissed the allegations, which his supporters claim are a politically motivated ruse by allies of President Jacob Zuma to derail his reform efforts at the Treasury. The finance minister has been under severe pressure since his return to the role following Zuma’s double sacking of Nhlanle Nene and little-known replacement David Van Rooyen in the space of four days in December. The return of Gordhan – who led the Treasury from 2009 to 2014 – calmed market participants dismayed by Zuma’s move.
The news came just days before Gordhan was scheduled to deliver his mid-term budget. Since returning to the role, the internationally respected Gordhan has attempted to implement a fiscally conservative regime in order to stave off the threat of a further credit ratings downgrade and kick-start growth in an economy flirting with recession.
International credit ratings agencies are almost certain to review their assessments of the country following the charges. In September, Moody’s released a quarterly credit report warning that political infighting at the Treasury would lead to a downgrade.
Moody’s – in common with major ratings agencies Standard & Poor’s and Fitch – rates South Africa marginally above junk status. Only last week, Gordhan appeared before the Financial Times Africa Summit in London, where he argued that the country was creating a “united front” to avoid a ratings downgrade and batted aside questions about his future.
“Being a democracy means that there will be moments when unusual things happen, which is part of political contestation…But [for] myself and other involved, our consciences are clear,” he said.
The news was immediately greeted with dismay by market watchers. John Ashbourne, Africa Economist at Capital Economics, said that the ‘self-inflicted’ move would pile further pressure on the rand and lead to political instability.
“If President Zuma does succeed in removing another respected finance minister, we expect that the rand will fall continue to sharply. A much weaker currency will add to inflationary pressures, and could force us to revaluate our view that the South African Reserve Bank’s tightening cycle has come to a close.”
Speaking before the news of Gordhan’s charges, Anton Eberhard, a former national planning commissioner and professor at the University of Cape Town Business School, said that further attacks on the Treasury would have dire fiscal implications for the country.
“The National Treasury is one of our best institutions and there are many highly experienced, competent and committed professionals working there,” he said. “The assault on the Treasury is very serious and we are already seeing the costs in terms of our national reputation as an investment destination and the risks of further downgrades in our credit ratings and access to reasonably priced debt.”