Intellidex chairman Stuart Theobald comments on rumours of the impending dismissal of the finance minister
The odd thing about Zuma’s latest effort to fire the finance minister is that he has a good reason for it. His relationship with the minister has irretrievably broken down. That is far more of a reason than he ever gave us for firing Nhlanhla Nene, including that he was to be appointed to a non-existent Brics Bank job.
That shows Zuma has learnt something from the last episode. He has been more careful this time. He consulted with both the SA Communist Party and the ANC’s Top Six before bringing down the blade. They have expressed their objections, but he has obtained their resigned acceptance. The death of Ahmed Kathrada has paused his hand, but the knife is still going to fall.
Along with the finance minister it looks like his deputy, Mcebisi Jonas, and the director-general, Lungisa Fuzile, are also going to be forced out, the last suspended rather than fired because Zuma does not have the authority to fire him directly. A new finance minister can finish the job.
I expect that several deputy directors general are going to walk out in solidarity. I can’t imagine that excellent long-standing officials like Ismail Momoniat, who oversees financial sector and tax policy, or Anthony Julies, whose responsibilities include the bond issuance programme and the financing of state-owned enterprises, are going to hang around while their mandates and achievements are destroyed by a newcomer.
And so, with a mass exodus from the Treasury in the wake of Gordhan and Jonas’s exit, one of our most capable institutions of state will be dramatically undermined. This, of course, is Zuma’s intention. With the management of Treasury out of the way, many of his immediate aspirations can be fulfilled. Current threats to him from the Treasury can be cut off at the knees, including litigation against the Guptas over their access to banking facilities and a Treasury investigation into past procurement deals by parastatals like Eskom and Transnet.
Treasury has been referring swathes of cases to the Special Investigating Unit, though that institution has weaknesses, particularly that the president has to grant a proclamation for investigations to take place. The Public Protector might investigate if it receives complaints, but that institution also seems to have bent to the president’s will. And embarrassing revelations, which have been speculated to emanate from Treasury, like Eskom directing tender deals to the boss’s step daughter, can be nipped in the bud.
In the medium term, constraints on the state-owned enterprises can be loosened, freeing them up to enter procurement deals far more easily, with Treasury guarantees enabling them to raise more debt. Treasury has to approve any deviation from the procurement rules of the Public Finance Management Act, and a more compliant leadership of Treasury will be sure to grant such approvals readily.
That would make life easier on many fronts, from renewing the social grants tender with Cash Paymaster Services, to condoning many unlawful procurements that have already accumulated. Treasury will no longer object when the Guptas want to form a joint venture with Denel to sell arms in Asia. And no longer will there be anyone to resist when state enterprises like SA Airways and Transnet want to appoint vastly overpaid consultants to do no identifiable job. Financially crippled institutions like the SABC and SA Airways will have far freer access to new cash. And the important prize of the nuclear procurement project becomes much closer to his grasp.
Many other institutions overseen by Treasury also suddenly become more compliant to his will. The Public Investment Corporation is the biggest investor in SA, commanding some 12.5% of the JSE. Those assets are meant to fund obligations to civil service pensioners, but those payments are guaranteed so it is really the tax payer that is on the hook.
The PIC’s assets represent enormous firepower that can be aligned with Zuma’s associates. SA Airways and the Financial Intelligence Centre, both of which have been a problem for Zuma and the Guptas of late, will also be forced to comply. And, of course, the SA Revenue Service, which formally reports to Treasury, will now have unfettered passage to do as Zuma commands, exacerbating the exodus of committed civil servants from that institution.
The consequences of all this will be at several levels. Financial management of the state will be compromised, the severity of which depends on just how much of Treasury’s top people leave. It will inevitably be sufficiently broken for ratings agencies to slash SA’s investment grade. Weaker procurement controls and the extension of guarantees to the SOEs will make the liability side of the government balance sheet much larger.
That means the state will be less creditworthy. Bond yields have already priced in a loss of investment grade, with most government and parastatal bonds yielding returns to investors in line with other sub-investment grade countries, though they will weaken further. The real problem is not so much the cost of issuing bonds, but being able to do so at all.
International funds, which are permitted only to invest in investment grade paper, will no longer be able to buy SA debt. Currently Treasury has major credibility with international investors, able to raise billions from them in hours. With that credibility shot, it will be far harder, if not impossible, for it to raise money on international markets.
A lack of access to international funders is something we’ve seen before – during Apartheid.
Then, the government, desperate to raise cash, passed laws compelling domestic institutions to buy its bonds. That sucks cash out of the private sector economy, so there is less investment and funding for private sector activity. It also forces interest rates up as the government tries to attract funding and stem the inevitable rand weakness that will follow the loss of international investor interest in our markets.
Needless to say, inflation is going to be a problem while the collapse of private sector investment will directly constrain economic growth, whether inclusive or otherwise, probably causing a recession. The joblessness and evaporating tax revenue will have obvious fiscal and social consequences that could lead to state collapse, leaving us vulnerable to the International Monetary Fund as the only institution left to meet the state’s obligations, at the price of regime change.
The Reserve Bank is technically independent of government, but once Zuma has the Treasury he wields significant power over the Bank that would be difficult to resist. The governor and deputy governors can hold out for a while, but ultimately a new finance minister can frustrate them to the point where they would have no choice but to step aside.
That would then free up Zuma’s influence on the banking system, trying via the Reserve Bank to force banks to do business with the Guptas, among other objectives. The Bank’s resistance to approving the acquisition of Habib Overseas Bank by a Gupta associate, currently subject to litigation, will evaporate. Of course, there will be no need for the Guptas to buy a bank if the commercial banking sector can be bent to their will via Treasury and the Reserve Bank.
Zuma will not be done yet, however. The court system has effectively become our second government. That is because government has a legal constitutional obligation to behave rationally. And when decisions are being made that are clearly not in the public interest or otherwise compliant with the Constitution, they are vulnerable to judicial review. Already there is an alarming pipeline of judicial review applications in the offing.
So Zuma may yet turn his sights onto the judicial system, which has anyway caused him much injury in the past. His means to do so is via the Judicial Services Commission, which must recommend new judges, and his power to appoint judges on the basis of those recommendations. Earlier this month, Zuma alarmingly summarily fired three of the most senior members of the JSC and announced three more junior replacements. He has the power to appoint four of the members and the ANC has written a policy paper calling for “radical transformation” of SA’s legal system.
The Treasury looks set to be added to the list of institutions Zuma has undermined, including the National Prosecuting Authority and the police services. He really has only one more major institution to go before his control of the state will be complete in the legal system. Then, it will be left to voters at the ballot box to exercise their own disciplinary effect on the governing party, provided, of course, their votes still matter when the day comes.
This article first appeared in the Azania News