Ramaphosa promises overhaul of South Africa’s economy

May 22, 2018

EUROMONEY / 21 MAY 2018 - 15.11 / OLIVIER HOLMEY

 

 

South Africa’s new deputy finance minister took a tough stance on corruption under former president Jacob Zuma – now Mondli Gungubele talks to Euromoney about the embarrassing Zuma years and the Ramaphosa government’s plans to turn the economy around.

 

Mondli Gungubele knows what it is like to take a stand against corruption at the highest level, which might explain why president Cyril Ramaphosa made him deputy finance minister.
 

 

Mondli Gungubele


 

In July last year, Gungubele said he would back a motion of no confidence against Jacob Zuma, whose years as president of the African National Congress (ANC) and South Africa were plagued by scandal and corruption, including allegations that a wealthy family from India used their links to the president to influence government decisions and the awarding of tenders.

 

Gungubele, a loyal member of the ruling ANC, was one of the few senior figures in the party to publicly criticize Zuma, South Africa’s most divisive president since the end of white minority rule in 1994.

 

As a member of parliament, Gungubele was known as a supporter of Ramaphosa, South Africa’s deputy president at the time. When Gungubele spoke out, outraged Zuma loyalists called for disciplinary sanctions against him, saying he was problematic, crude and defiant. In February, Zuma was forced out of office and Ramaphosa stepped into his place.

 

Within days, the new president had removed or demoted several Zuma loyalists from top posts, including at the finance ministry, where he appointed Nhlanhla Nene as the new finance minister and Gungubele as his deputy.

 

Does Gungubele feel vindicated by the change in leadership and by his own promotion? “I wouldn’t use the word vindicated,” Gungubele tells Euromoney in an interview on the sidelines of an African ministerial meeting in Abidjan.

 

“I don’t regret what we did because our organization was in a slumber mood and some people liked to stand up and challenge that. Because the organization, knowing its philosophy, its historic purpose, you could say philosophically it was off the rails.”

 

Change was necessary, he adds, because the ANC had become an organization in which “leadership tolerates corruption, tolerates fraud, tolerates indiscipline” and was “becoming some kind of cult”.

 

The new government’s most urgent task is to repair the damage done in the Zuma era. Ramaphosa must restore public confidence in the ANC ahead of the 2019 general election, put an end to political uncertainty and tackle the many economic problems that have put the country’s credit rating at risk, including feeble growth, high unemployment, a heavy debt burden, failure to meet revenue targets, ailing state enterprises and widespread corruption.

 

Gungubele is in one of the busiest ministries in terms of work to be done and reputation to be repaired. Under Zuma, ministers were rotated through the finance ministry in quick succession, undermining its credibility.

 

But Ramaphosa’s appointment of Nene as finance minister in February has gone down well. Nene had been deputy finance minister from 2008 to 2014 and then finance minister, during which time he stood out for his open criticism of wage increases for public servants, of the management of public utilities, of the plan to build several new nuclear plants and of expensive presidential perks.

 

Controversially, Zuma removed him in December 2015 in favour of the relative novice, David van Rooyen, whose appointment received such a negative market reception that he lasted just three days in the job.

 

Now Nene is back in charge and appears eager to resume the task of reining in public spending.

 

Warning In a statement last November, the IMF warned that much work needed to be done to improve South Africa’s finances.

 

“South Africa’s slow growth and inefficiencies in public enterprises have taken a toll on public finances by generating a substantial revenue shortfall and prompting unplanned expenditure,” it said, and urged the approval of “fiscal measures to avoid undue increases in the debt-to-GDP ratio, including by strengthening tax revenue compliance and cutting unproductive outlays.”

 

The IMF also recommended reforms to increase competition in key markets, reducing costs for households and businesses, which would in turn, it argued, lead to a virtuous cycle between economic growth, job creation and inequality reduction. South Africa’s GDP has grown at an average annual rate of just 1.5% over the last five years, putting it in a league with the lethargic economies of Europe rather than some of the booming countries in Africa.

 

The finance ministry also has to reckon with a debt-to-GDP ratio that had climbed to 53% at the end of last year, from 31% in 2009 when Zuma came to power. Rising debt issuance has increased the credit rating risk and pushed up yields.

 

When Zuma became president, South Africa was comfortably rated investment grade by all three agencies, having gone through several rating upgrades at the turn of the century.

 

Because of the rising debt burden and policy uncertainty, Standard & Poor’s and Fitch have cut South Africa’s debt to junk status. Meanwhile, Moody’s rates it Baa3, putting the country at the riskiest end of investment grade, and had it under review for a downgrade at the end of last year.

 

With Zuma’s ouster and Ramaphosa’s stated commitment to turning South Africa around, Moody’s reaffirmed its investment-grade rating. Something we will debate for many years to come, maybe until I die, is how it was possible that three individuals from another country find themselves in our country and take control of our country   - Mondli Gungubele

 

Slow economic growth and financial mismanagement do not only affect the central government’s finances; Nene recently told city managers in Johannesburg that some South African cities were “on the brink of collapse”, although he did not specify which ones. So, what steps have been taken, or are under way?

 

In addition to appointing new ministers of finance, state enterprises and mining, Ramaphosa has replaced the boards at several ailing state enterprises, promising to make them more efficient and reduce corruption in areas such as procurement. Within weeks of becoming president, he suspended the head of the South African Revenue Service, who had been appointed by Zuma, saying he had lost the confidence of taxpayers.

 

The tax agency, which comes under the finance ministry, had missed its revenue collection targets and faced allegations of corruption and mismanagement. In the 2017/18 fiscal year, the treasury said it faced a R48.2 billion ($3.8 billion) revenue gap, partly because the tax agency had missed its collection target.

 

Another measure intended to address the revenue shortfall is a controversial increase in value added tax and personal income taxes, expected to bring in about R36 billion in the 2018/2019 financial year, marking the first VAT increase under the ANC.

 

“The immediate challenge we had as treasury was to stabilize fiscally by arresting expenditure, ensuring we take measures that improve revenue,” Gungubele says of the urgent need to correct the shortfall.

 

But the only specific measure he mentions is one that would in fact increase spending: the government plan to invest R57 billion in higher education. Because graduate unemployment is so low in South Africa, he says there is “more to benefit than to lose” from such an investment, however.

 

Ramaphosa also says he wants to attract $100 billion in new foreign investment, which he hopes will create jobs and stimulate growth, and has appointed a team of respected investment envoys to scour the globe.

 

The final years of Zuma’s presidency were dogged by claims of widespread corruption, which deterred investment. South Africa ranked 71st out of 180 countries in Transparency International’s Corruption Perceptions Index in 2017, falling from 64th place the previous year; not only it was a long way behind New Zealand, the least corrupt country, but also far behind Botswana (in 34thplace) and Namibia (53rd). Dispiriting

 

To Gungubele, the Gupta scandal is the most dispiriting story of recent years. Born in India, the Gupta brothers – Ajay, Atul and Rajesh – built up a family business in South Africa and came under scrutiny as allegations surfaced that they had used their close relationship to Zuma to advance their interests by influencing the awarding of tenders and even such high-level political decisions as the hiring and firing of cabinet ministers.

 

They have denied these claims, as has Zuma. “Something we will debate for many years to come, maybe until I die, is how it was possible that three individuals from another country find themselves in our country and take control of our country,” says Gungubele.

 

Former president Jacob Zuma

 

Former president Jacob Zuma He says he remains fond of Zuma – “I still love the man” – and says that he was one of those who approached Zuma in 1997 to encourage him to run for the deputy presidency of the ANC, an important stepping stone in the future president’s political career. But Gungubele nonetheless calls the late years of Zuma’s mandate the Gupta era, and says it was an embarrassing time for the country.

 

One way South Africa could save several million dollars is by getting rid of its 30 or so deputy ministers. Deputy ministers are not cabinet members and are not appointed for their technical expertise, says Paul Kaseke, an academic, on the website

 

The Conversation. Indeed, Gungubele has no specified responsibilities at the finance ministry.

 

But Gungubele’s image as a hard-talking advocate for government transparency makes him a potentially useful asset for a government eager to improve the ANC’s image in South Africa, and the country’s perception among investors abroad. While he attracted attention for denouncing Zuma in parliament, Gungubele was, until his appointment as deputy minister, a prominent member of the parliament’s Portfolio Committee on Public Enterprises.

 

He questioned Brian Molefe, the chief executive of state-run utility Eskom, as part of a high-profile parliamentary inquiry into Africa’s largest producer of electricity. Eskom has also been embroiled in the Gupta scandal: it is alleged that Eskom paid a company owned by the Gupta family even though the company did no work for Eskom. We don’t need to devise anything new.

 

Let’s implement our laws   - Mondli Gungubele Gungubele has been accused by political rivals of mismanagement and corruption during his time as mayor of the metropolitan municipality of Ekurhuleni, east of Johannesburg.

 

Asked about these accusations, he says that the municipality did not always strictly follow procedures for appointments and spending, but adds that these were honest mistakes, rather than signs of corrupt behaviour.

 

The claim that he too may be corrupt he dismisses as “hogwash”. He adds that while he was mayor, from 2010 to 2016, Moody’s stated that Ekurhuleni was the best-run municipality in the country and gave it two clean audits.

 

A review of Moody’s reports on Ekurhuleni shows that Moody’s rated Ekurhuleni “at the high end of the range of South African municipalities” by the time Gungubele left office in August 2016. 

 

During Gungubele’s term as mayor, the municipality’s rating fell by two notches, from Aa2 to A1 with review for possible further downgrade, but this fall, Moody’s said, reflected declines in the sovereign rating, rather than issues specific to the municipality.

 

Gungubele says that no new rules are needed to tackle the issue of corruption and is confident that the problem can be easily addressed.

 

“It’s always easy to stop corruption,” he says. “All of what you need is consistency. Once you’ve got rules to deal with corruption, implement them. If you got an attorney general, respect the role of the attorney general, if you got an internal audit, respect the internal audit.”

 

He adds: “We don’t need to devise anything new. Let’s implement our laws.” Reserve Bank On other issues pertaining to the finance ministry, Gungubele is less knowledgeable, perhaps because he has only been in his job for a short time.

 

He does not remember how much debt South Africa intends to issue in international bond markets, saying he believes it is $3 billion over the next three years, when in fact the government has indicated a $3 billion target for this fiscal year alone.

 

Gungubele has a little more to say about the ANC’s plan to nationalize the South African Reserve Bank, which, unusually for a central bank, is owned by private shareholders – about 650 of them, both South African and foreign, with each shareholding limited to a maximum of 0.5%. Gungubele neither supports nor opposes the plan. “It’s neither here nor there”, he says.

 

But he defends the plan against one point of criticism: that the Reserve Bank may lose independence as a result of the change.

 

“For us, the important thing with the Reserve Bank is not [so] much its ownership,” Gungubele says, “it’s this independence – and the independence is sealed and signed in the constitution…

 

All I know is that many countries own their reserve bank but they are able to keep its independence.”

 

Some critics of the current ownership structure have argued that, were the bank owned by the state, it would do more to advance national causes, such as employment and black representation in the financial sector.

 

Supporters of the current set-up say the annual general meeting of the bank’s private shareholders helps to foster transparency in the institution.

 

When asked about the finance ministry’s implementation of regulatory changes first touted in 2011 – namely, the Financial Sector Conduct Authority (FSCA) replacing the Financial Services Board, and the introduction of a new Prudential Authority (PA) – Gungubele seems initially at a loss.

 

“How do they divide these roles?” he asks, turning to his aides as he tries to recall the difference between the two regulators.

 

That lack of detailed knowledge may seem surprising given that his boss, Nene, has personally championed this change, known as ‘the Twin Peaks system’, calling it “dynamic, innovative and smart” in his speech marking the launch of the PA at the start of April.

 

Eventually, Gungubele does remember what each one does – the PA will look to enhance the soundness of regulated financial institutions; the FSCA will protect financial customers through supervising market conduct – and says these changes will “consolidate” the South African financial regulatory system.

 

It was the former finance minister, Pravin Gordhan – the man Ramaphosa has picked to shake up state enterprises – who initially set these regulatory changes in train.

 

As finance minister, Gordhan ordered a study of South Africa’s response to the global crisis of 2008; the report noted an international trend away from the single-regulator approach, recognizing the different skill sets required for prudential and market conduct regulation.

 

While economic growth slowed as a result of the crisis, the country’s financial sector emerged relatively unscathed. Still, the report noted, more should be done to protect the sector from harm in future.

 

“Given South Africa’s historical neglect of market conduct regulation,” it said, “a dedicated regulator responsible for consumer protection, and not automatically presumed to be subservient to prudential concerns, is probably the most appropriate way to address this issue.”

 

Confidence

 

The partial renewal that has taken place at the top of South African politics, and its promotion by Gungubele and others, has achieved Nene’s first objective, that is, to bolster investor confidence in the country. The rand has strengthened, inflation has fallen, and Moody’s opted not to downgrade the country’s debt rating after all.

 

 

The IMF has raised South Africa’s GDP growth forecast for this year from 0.9% to 1.5%.

 

The country’s banks, too, have felt the Ramaphosa effect, as they begin to benefit from lower coupons when raising capital. More controversially, South Africa’s parliament has passed a constitutional amendment, supported by the ANC, which allows the expropriation of white owners’ agricultural land without financial compensation.

 

Ramaphosa himself has spoken out in favour of the transfer of land from white to black ownership, to help redress enduring racial inequity.

 

But the issue is highly charged, and the main opposition party has argued that such action would undermine property rights and scare off potential investors. It could also have a devastating effect on the banks, as they have lent billions of dollars to farmers.

 

South Africa is prepared to consider partially privatizing struggling state-owned enterprises, including South African Airways and Eskom, National Treasury director general Dondo Mogajane told Reuters recently.

 

 

 

The new government has yet to release a budget. But the 2018 budget presented by the former finance minister days before his replacement by Nene already projected a narrowing of the deficit from 4.3% of GDP in 2017/18 to 3.5% in 2020/21, thanks in part to the one percentage point rise in VAT that came into effect at the start of April.

 

Still, as Nene is well aware, much more needs to happen if Ramaphosa’s administration – many members of which previously worked with Zuma – is to convince South Africans that it has the requisite independence and tenacity to address the country’s ills and overcome the ANC’s past failings.

 

Asked if he personally harbours higher political ambitions, Gungubele, now 61 but only just becoming a household name in South Africa, replies:

 

“To be honest with you, my ambition is to be allowed to execute this one [role] and see later, if and when I conquer it, if there’s any other task I would look for.”

 

He adds: “For now, the task I’m given is the biggest ever.” Perhaps his primary role at this moment is more to promote a certain image of South Africa – confident, forward-looking and free of corruption – than to explain the minutiae of Nene’s still only partially devised reform programme.

 

And indeed he speaks with great enthusiasm of Ramaphosa, Nene and Gordhan, who is also widely seen as a strong anti-corruption advocate.

 

“Knowing their track record, consistency, credibility, dependability, I wouldn’t have asked for any other opportunity than the one I’ve got to work with them,” he says. “I’m lucky to be a little mouse in their space.” 

 

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LINK : https://www.euromoney.com/article/b184wy8j7509xg/ramaphosa-promises-overhaul-of-south-africas-economy

 

Disclaimer - The views expressed here are not necessarily those of the BEE CHAMBER

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