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The South African economy will be bolstered if Zuma falls

- Jannie Rossouw

South Africa’s President Jacob Zuma narrowly escaped a call from some senior members of the governing party’s national executive committee for him to step down.

The first stern action from inside the African National Congress’ (ANC) leadership against Zuma, while quelled by his supporters, is reverberating far and wide. The economic cluster of government is likely to be the main target. The Conversation Africa’s business and economy editor Sibonelo Radebe asked Jannie Rossouw what impact this will have on the economy.

What impact will the upheaval inside the ANC have in the economic arena?

South Africa is currently suffering the consequences of a “low growth trap”. One of the reasons for this low growth-trap is that business people lack confidence in the Jacob Zuma government and therefore investment is suffering. Confidence will only begin to be restored after President Zuma steps down, as he is one of the main reasons for low confidence. The fact that he was challenged by some members of the National Executive Committee (NEC) of the ANC suggests that his stepping down might be earlier than 2019, which is good news for the economy.

The economy has suffered greatly under Zuma. Having registered 1.5% growth last year, GDP is expected to clock something close to zero growth this year and only slightly above 1% growth in 2017 and 2018. Growth has averaged less than 2% per annum since Zuma’s rule commenced in 2009.

With this rate of growth South Africa will not win the battle against high unemployment, poverty and inequality. We must all be worried that the latest unemployment rate rose to about 27%.

The situation requires stern corrective action. We all know that the South African economy needs a deep structural reform to get out of the low growth trap. Zuma has proved incapable of leading the required reform. It is not only apparent incompetence that seems to prevent him from ordering and leading the reform but he seems distracted by other interests and projects of a personal nature. In addition to mounting legal battles, Zuma’s attention seems to be on enriching his family and friends, the Guptas, while the South African economy suffers.

Do you expect a strike back against the individuals who led the call?

I expect some form of sanction by Zuma against the members of Cabinet that spoke against him in the NEC. The obvious sanction will be to remove them as Cabinet ministers, because their action is tantamount to a motion of no confidence in the President. The mere fact that we have not seen sanction yet implies that Zuma’s position might be weakened. This is a very positive development for South Africa’s economic future.

The Cabinet members that spoke against Zuma in the NEC are in the main from the economic cluster. If Zuma fires them, it will provide him with a perfect opportunity to appoint his cronies to these positions in Cabinet and to continue with state capture. The unfortunate consequence will be a South African credit risk downgrade.

What sorts of market reaction are you expecting?

The market will react positively when Mr Zuma finally steps down. A case in point is the exchange rate of the Rand. The exchange dropped from R7,32 against the dollar in 2010 to the current level of some R14,00. There is no doubt that a significant portion of the recent rand slide is directly due to the Zuma factor. Consider the losses suffered in December 2015 when he fired finance minister Nhlanhla Nene and replaced him with the unknown Des van Rooyen. That move caused a significant rand slide and general market jitters wiping out hundreds of billions of rands on financial markets.

While Zuma was forced to remove Van Rooyen from the ministry of finance to replace him with the trusted Pravin Gordhan, he appears to have allowed the creation of a toxic environment around the National Treasury. Its been widely reported that the harassment of Gordhan by law enforcement agencies serves Zuma’s mission to capture the state and in particular the National Treasury in order to raid the public purse at will. This saga has also played its fair share in the depressed value of the local currency.

The exchange rate will most likely improve once Zuma steps down, and such an improvement will result in lower inflation. An appreciation of the local currency will also help to avoid a credit downgrade.

What should economic players, mainly business and households, be doing?

Business should do what it is good at, namely doing business. But policy certainty and a corruption-free environment are necessary to restore confidence. Business leaders should unite in their calls for a corruption-free business environment and lead by example in refraining from paying any forms of bribes. They should also unite in their support of the few pockets of excellence that still exist in the government despite Zuma, for instance the National Treasury and the SA Reserve Bank.

How can South Africa get out of this hole?

South Africa urgently needs higher economic growth. This will create fiscal space for the government and will also help to lower the unemployment rate. Higher growth can only follow on the back of increased investment, so government must ensure an investor-friendly and corruption-free environment.

Escaping a credit risk downgrade contributes to the restoration of international and domestic investor confidence and will support increased investment. However, the continued bi-annual focus on risk ratings increases the danger of short-termism in planning. South Africa should therefore move out of the danger zone of a possible downgrade to refocus on long-term investment planning and sustained economic growth.

In the quest to avoid a downgrade, it is imperative that Gordhan should be retained as minister of finance. Credit rating agencies realise that a downgrade to junk status will give Zuma reason to replace Gordhan. They will therefore refrain from downgrading the country in the quest to keep Gordhan in his position and Zuma’s hands off the Treasury.The Conversation

Jannie Rossouw, Head of School of Economic & Business Sciences, University of the Witwatersrand. This article was originally published on The Conversation. Read the original article.

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