South African Finance Minister Pravin Gordhan has received a summons to appear in court on charges of fraud relating to allegations of misconduct when he was in charge of the South African Revenue Services (SARS)—the country’s tax collection agency—a decade ago. This news sent the rand and share prices tumbling. The rand dropped by 3.4 percent against the dollar (Figure 1) and over 46 billion rand ($3.3 billion) was wiped off the market capitalization of South Africa’s six biggest banks. Government and dollar bonds fell sharply, while the cost of insuring exposure to South African debt leapt to three-month highs.
While there were fears of an earlier South African sovereign debt downgrade to “junk” status, credit ratings agency Moody’s senior analyst Zuzana Brixiova insisted that despite a noisy political scene, “South African institutions remain strong […] The noise is not an issue; it is only an issue if it impedes structural reform and investor confidence.” While the case is invoking unrest in the capital, South Africa’s economic team is determined to calm the markets. Gordhan maintained that the mini budget to be announced in two weeks will not be derailed by the news. The National Treasury Director-General Lungisa Fuzile held that the Treasury remains “resolute to make sure that on that date [October 26] we are able as a team—led by Minister Gordhan and [Deputy Minister Mcebisi] Jonas—to table yet another medium-term budget statement.”
This recent news is the latest in the South Africa’s macroeconomic woes saga, ignited by a deteriorating mining sector and a drought-induced decline in agricultural production. The country has seen its currency decline against the dollar since mid-January. On a positive note, the weak rand has helped boost South African exports; the country’s trade deficit became a trade surplus in the second quarter of 2016. Conversely, the country’s current account surplus was at more than 4 percent of GDP in the first half of 2016. The latest World Economic Outlook predicts a GDP growth rate of 0.14 percent for 2016, down from 1.265 in 2015, its lowest growth rate in since 2009. The country has also been adopting proactive measures—such as halting the interest rate hike—in order to ensure the smooth recovery of its economy.
Source: World Economic Outlook
Junaid Belo-Osagie contributed to this post.