Pravin Gordhan Charged

On Tuesday National Director of Public Prosecutions, Shaun Abrahams charged Finance Minister Pravin Gordhan with fraud related to an early retirement package that Gordhan approved for his former deputy Ivan Pillay (see the actual charge sheet here). The rand immediately dropped 3.4% vs. the US dollar and bank stocks fell 5.12%, wiping R46.3 billion off the value of the JSE.

The move is interesting because up until now the accusations against Gordhan have focused on his alleged involvement in setting up a rogue surveillance unit at the South African Revenue Service [“SARS”]. Leading legal experts and organisations described these “rogue unit” accusations as baseless and politically motivated. The fraud charges seem to be no better and even the National Prosecuting Authority [“NPA”] is internally divided on the charges. One advocate commented to City Press that “ the decision to prosecute is legally and materially flawed and won’t stand or fly if challenged in a court of law”. Another NPA advocate more simply and probably more accurately described the decision as “a major F*** up”. Abrahams denied that the charges were politically motivated.

Gordhan is important to the South African economy because of his role in maintaining the stability of the rand and helping SA to avoid a credit ratings downgrade.

The rand is South Africa’s most sensitive barometer of political shenanigans. The currency threatened to collapse following the NPA’s announcement, but then improved when Abrahams suggested that he was willing to review the charges. The chart below plots the value of the rand vs. the US dollar since the “Nenegate” scandal last December. There was certainly potential for things to have been a lot worse and given the prospects of a US interest rate rise, I think that the rand has held up remarkably well. It is possible that financial markets have become desensitised to political noise or that the charges are seen as so weak that a date in court may actually strengthen Gordhan’s position.

The rand since Nenegate - Source Fin24 / Xe.com

The rand since Nenegate - Source Fin24 / Xe.com

Unfortunately the credit ratings agencies will not ignore SA’s political challenges. This week, S&P’s managing director for sub-Saharan Africa commented that “what has changed in South Africa is that political tension, political turmoil has come to the fore”. Gordhan is important to SA’s investment grade credit rating because he is seen as a champion of sound economic policies and protection against wasteful government spending and the fiscal effects of corruption. S&P is the ratings agency most likely to downgrade SA to junk and is due to announce its decision on 2 December. Former Finance Minister, Trevor Manuel, seems to think that a downgrade is a foregone conclusion. This would be a major negative shock to SA’s economy, but the country’s issues are so well known that a significant amount of the downgrade effects are already priced into asset values.

DR ANDREW LOUW CFA

Sources: AmaBhungane, Reuters, City Press,