President Jacob Zuma dismissed nine ministers in a late-night cabinet reshuffle. More importantly, for the fourth time in two years a new finance minister has been selected. Malusi Gigaba, the home affairs minister who has been Zuma’s close ally, will replace Pravin Gordhan as South Africa’s finance minister. Gordhan was appointed in December 2015 to restore financial market stability after Zuma abruptly substituted Nhlanhla Nene as finance minister with a little-known backbencher. After a year-long power struggle between Zuma and Gordon over Treasury efforts to eradicate cronyism in state-owned companies and decrease the influence in government of the Gupta business family close to Zuma, Gordon was discharged. Opposition parties called for Zuma to resign after the decision to lay off Gordon and filed a motion for a no-confidence vote in parliament.
Impact on country risk
The forced departure of Gordhan, popular with investors, can have an important negative impact on the economy. Firstly, the South African rand plunged since his dismissal as the news spooked the financial markets. Consequentially, the elevated inflation (around 6.7% at the end of 2016) can increase further, stopping the path of interest rates cuts. Secondly, Gordhan’s efforts to rein in spending can be curbed, leading to a higher fiscal deficit (expected at -3.9% of GDP in 2017) and pushing up public debt (estimated at 51.7% of GDP at the end of 2016). Additionally, the country can lose its investment grade status with rating agencies, which is likely to have a negative impact on investments and external debt service. Indeed, S&P already downgraded the country to junk for the first time since 2000 based on the dismissal of Gordhan and the likely negative impact on fiscal consolidation and growth. The cabinet reshuffle can also set the stage for a political crisis for the more than 20 year ruling African National Congress (ANC). The cabinet reshuffle is probably a move of Zuma to reward loyalists and shoring up his preferred successor: his ex-wife, Nkosazana Dlamini-Zuma. Zuma already survived a series of scandals since he became president in 2009 and is likely to overcome a possible no-confidence vote in parliament. However, the firing of Gordhan can exacerbate the existing divisions in the ANC, putting pressure for an internal revolt. Political tensions are likely to escalate further during a five-yearly party vote in December where Zuma’s replacement as ANC president (and thus presidential candidate in the elections in 2019) will be elected. Furthermore, popular protests and civil unrest are likely to increase in the coming months.
Analyst: Jolyn Debuysscher, email@example.com