Risk of Downgrade increases over Gordhan Saga

It is Pravin Gordhan, re-appointed Minister of Finance, who faces the Hawks, parastatal and independent forensic task-force team that watches over the behavior of Government. Currently the Hawks seem to be in the lead, but what should give rise to hopes for a functioning protection squad working for constitution around the clock, might quickly turn into the single largest risk for the economy South Africa has yet to be seen: Should Finance Minister Pravin Gordhan be fired – again – by President Jacob Zuma, the probability of a foreign currency ratings downgrade by S&P to sub-investment grade – and maybe even a review earlier than scheduled – would be significantly increased, according to international market research company Citi Velocity.

Earlier this week the elite police unit the Hawks ordered Gordhan and others to report to them in Pretoria on Thursday in relation to an alleged “rogue” unit located within the SA Revenue Service (Sars), during the time that Gordhan was Sars commissioner. Gordhan refused. “We are now more concerned that, even if this week’s political events come to nothing, there is now a higher degree of political uncertainty in the minds of the rating agencies,” Citi said in statement. In its view, this week’s political events have made attaining certain factors to avoid a December 2016 rating downgrade by S&P even more important.

These factors include the gross domestic product (GDP) growth outlook not deteriorating significantly between now and then; the mini budget in October being mimicking the February 2016 targets; and, most critically, labour reform announced that includes both the secret strike ballot and a national minimum wage at a feasible levels. “Of course, this assumes all things being equal with regards to other important factors such as state owned enterprises (SOEs). Any negative announcements that would risk government guarantee exposure and therefore contingent liabilities, would clearly be a negative towards the December decision,” said Citi.

h3. Economy at ZERO % Economic Growrh

Citi’s baseline remains for 0% GDP growth in SA this year and a cyclical recovery to 1% next year. “This is, however, almost entirely cyclical whereas the structural underpin of the GDP trajectory has not improved. Heightened political risk, if sustained, impedes sentiment, which can exert substantial downward pressure on GDP growth,” it said.

Citi added that, should the rand continue to weaken, this, together with lower investor, business and consumer confidence, could cramp the cyclical upturn it expects for 2017 GDP growth.

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