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4 months ago
South Africa's credit ratings at risk as Gigaba takes over Treasury
March 31, 2017 / 3:36 PM / 4 months ago

South Africa's credit ratings at risk as Gigaba takes over Treasury

6 Min Read

* Fiscal discipline in focus after reshuffle

* Home affairs head appointed new finmin

* Zuma fires Gordhan as finance minister

By Olivia Kumwenda-Mtambo

JOHANNESBURG, March 31 (Reuters) - New South African Finance Minister Malusi Gigaba got a sceptical welcome on financial markets on Friday, with fears growing that budget discipline will falter despite a risk that the country's credit rating will be downgraded to "junk" status.

Economists and political analysts questioned the credentials of Gigaba, until now the home affairs minister, to replace Pravin Gordhan who built a strong reputation for fiscal prudence on markets but was sacked overnight by President Jacob Zuma.

Some gave Gigaba, a 45-year-old former African National Congress (ANC) youth league leader, the benefit of the doubt - up to a point.

"Gigaba is not necessarily the worst choice for the position, having a fair amount of policymaking experience – though very little within the fiscal space," BNP Paribas Securities South Africa economist Jeffrey Schultz said.

But others did not. "His performance at Home Affairs offers no promise that he will be able to handle the Treasury. There is nothing there to suggest he can do that," said Gary van Staden, a political analyst at NKC Oxford African Economics.

South African assets tumbled after Zuma fired Gordhan, threatening to split the ANC that has governed since the end of apartheid. The rand dropped as much as 2.4 percent in a fifth straight session of losses before regaining some ground against the dollar to trade down 0.7 percent.

Credit ratings agencies have warned the government against a shift to populist policies to please the electorate after the ANC lost significant ground in local elections.

S&P and Fitch both rate South African debt one level above junk status, and Moody's two notches above.

"We believe fiscal consolidation is likely to become less of a priority and the move to improve transparency and governance of state-owned enterprises will be halted," ratings agency Fitch said on Friday.

Some pundits say Gordhan was under pressure by a faction allied to Zuma, which has criticised his plans to rein in government spending as the economy stagnates and have attacked his running of the tax agency and state-owned firms.

Some of Zuma's allies had said Gordhan's importance was over-exaggerated and his close relationship with investors and ratings agencies showed he was not focused on helping to transform the economy and the position of the black majority.

But Daniel Silke, director of Political Futures Consultancy, said Gigaba had to tackle the ratings issue rapidly. "He's got a very tough job trying to reassure those agencies almost immediately," he said.

Big Shoes to Fill

Under Gordhan, South Africa scored some credit rating positives, including an announcement that costly nuclear power expansion plans are being slowed and the introduction of a minimum wage aimed at avoiding economically damaging strikes.

"There are big shoes to fill at the Treasury," Standard Chartered Bank's Chief Africa Economist Razia Khan said. "But it's the concern that the (ministerial) changes were made to allow a relaxation of that very fiscal restraint that the Treasury was known for, that will now weigh more heavily. For investors, this signals much uncertainty ahead."

Gigaba's unexpected appointment makes him the fourth minister to lead the Treasury in just under two years as South Africa grapples with low growth and high unemployment. He will hold his first press conference on Saturday.

While Gigaba lacks an economics background, he is not a novice when it comes to policymaking. One of the youngest ministers in Zuma's cabinet, he was public enterprises minister between 2009-2014, with oversight of state-owned firms.

At the Home Affairs department, Gigaba launched a drive against corruption, arresting tens of officials in his department.

He provoked a storm after overseeing the introduction of strict visa rules that hit tourist numbers before the cabinet ordered a review to resolve the impasse. He also introduced changes that intensified company inspections to make sure businesses comply with the requirement to employ a minimum of 60 percent South African citizens.

Gigaba is known for his colourful outfits and frequent posts on social media, leading the radical leftist Economic Freedom Fighters, led by Julius Malema, to call him South Africa's "Minister of Instagram" last year.

One of the most eloquent speakers within the ruling party, Gigaba has a Masters degree in Social Policy, majoring in Urban Affairs and Policy. He will stand at the centre of Zuma's pledge "to bring about radical socioeconomic transformation", including land redistribution and creating jobs for black people.

The ANC suffered its biggest political blow since the end of apartheid during local elections held in August, losing control in three cities as voters vented anger at corruption, high unemployment and poor public services.

The party is criticised about inequality in a country where blacks make up about 80 percent of the population of 54 million, but ownership of land and companies remains mostly in the hands of whites, who account for about 8 percent of the population. (Additional reporting by Tanisha Heiberg and Ed Stoddard; Editing by James Macharia)

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