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Economic impact of NPA summons of Gordhan

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As the focus within South Africa has largely been directed toward the on-going #FeesMustFall protests, chaos within National Treasury appears to have taken a backseat. Over the past few months, embattled finance minister, Pravin Gordhan has been fanning flames of his alleged contravention of the National Strategic Intelligence Act and the Public Finance Management Act. The allegations are related to his approval of former South African Revenue Service (SARS) commissioner Ivan Pillay’s early retirement in 2010 and to the alleged creation of an intelligence unit within SARS.

Following pressure by the Hawks, the National Prosecuting Authority on Tuesday summonsed Gordhan to appear in court on charges relating to fraud on November 2, 2016. This comes a month before S&P Global Ratings is due to release the review of its assessment on South Africa’s credit status, which currently stands at one level above junk. The move has been described by many as “state capture” by certain prominent individuals.

Speaking to VOC’s Breakfast Beat, director and chief economist at Econometrix, Dr Azar Jammine explains that both the drop in the rand and the subsequent impact on the country’s economy is directly linked to the attempt by certain individuals to capture the state.

He says that if Gordhan is successfully booted out of his position and replaced by an individual who is more amenable to deals made by individuals who are well-connected to the presidency, then the implication would that the actions of interests groups can be expected to threaten the economic stability of the country.

“The public debt would rise and that would result in South Africa enduring at least one credit rating downgrade – if not more,” he stated.

Jammine asserts that this will consequently result in money flowing out of the country with a stark decrease in capital inflows to be expected.

Given the recent hammering of the banking sector, he says that South African banks can automatically expect to receive credit rating downgrades as well.

While the markets will need to wait to see what happens on November 2, he asserts that he would like some effective measures to be instituted following the investigation.

“The battle lines within the African National Congress, between those who are supportive of Zuma and Gupta and the idea of state capture, and those who want to see corruption eliminated are now so acute that one wonders if any outcome can overcome this,” he asserted.

In a marked event, Gordhan is scheduled to render the budget speech on October 26, 2016,, which Jammine notes is expected to have a profound impact on the economy.

“If a cabinet reshuffle pans out, I think what would be seen is a massive fall-out in financial markets.”

He says that Gordhan may retain his position since his departure is expected to result in a massive fall-out within the financial sector, consequently impacting even those who are involved in the alleged state-capture.

“In the wake of such a massive financial fall-out, even many of these capturers would lose out so much and their wealth would diminish significantly.”

Jammine explains that confidence can be restored in the governance of the state if Gordhan remains in his position, once the Fees Must Fall concerns are effectively dealt with by all stake-holders, and once the drought in the Northern Cape ends.

He, however, notes that given the current price of the rand, scope for increased export opportunities does exist.

“With inflation reaming fairly low, there is in the medium-term some scope for the economy to recover if stability finds its way through. But it remains a very anxious time from an economic point of view,” Jammine explained.

VOC


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