SA finance minister facing legal charges results in huge fall for ZAR

The South African finance minister is facing charges of fraud, which has caused the rand to drop by 4%.
 
The South African rand has been trading strongly in the last few months as a result of good economic data and positive corporate movements, such as the SABMiller AB InBev deal, which would result in huge amounts of money flowing into South Africa.
 
However, the rand has plummeted in the last couple of days – the result of a sudden turbulent political situation.
 
South African finance minister Pravin Gordhan has been issued with a summons to appear in court on 2 November over fraud charges. The charges relate to misconduct allegations at a time when he was in charge of the country’s tax collection service.
 
As a result, the rand dropped by 4% against the US dollar in the immediate aftermath and it is still in a very weak state.

What are the charges?

The charges against Mr Gordhan relate to the authorisation of an early retirement payout to Ivan Pillay, then a senior official in the South African Revenue Service (SARS).
 
Mr Pillay had been employed on a five-year contract at the SARS and received a pension bonus of R1,141,178.11 (£64,591.54) upon the end of his contract.
 
Director of South Africa’s National Prosecuting Authority (NPA) Shaun Abrahams said that the contract was unlawful and that Mr Gordhan acted with intent to defraud when he signed it.
 
It is also alleged that Mr Gordhan oversaw the set-up of a surveillance unit within the SARS. The unit was established to infiltrate networks importing luxury goods among other things. However, these allegations are unrelated to the fraud charges.

What happened to the rand?

Mr Gordhan is a widely respected official in financial markets so the idea of him facing legal action over fraud is a shock. This was seen in what happened to the country’s currency immediately after the announcement that he would be taken to court.
 
The rand saw a sudden and significant drop. Its value fell by 4% against the US dollar, a huge amount in just a few minutes. For a currency that had been performing well in recent weeks, it was a significant blow.
 
It also fell in value against the pound and the euro, losing any ground it may have been making on those major currencies.
 
It wasn’t just the rand that was affected. Shares in leading South African banks fell more than 5% and bond yields rose dramatically. Almost R50 billion (£2.8 billion) was wiped off the Johannesburg Stock Exchange (JSE) after the announcement was made.

What will happen now?

Analysts expect the rand to remain weak until Mr Gordhan is taken to court. When that happens, the rand’s value will likely depend on the outcome of the trial.
 
As if that wasn’t bad enough, it is thought that South Africa will now likely face a credit rating downgrade to junk status. It may also result in the country having to rely on more borrowing.
 
South Africa was due for a credit rating review by S&P Global Ratings and Fitch Ratings in December, but it is thought that this might be brought forward following the announcement of the legal action. Currently, the country’s rating is at one level above junk.
 
Politically, many analysts have expressed the view that president Jacob Zuma would like to remove Mr Gordhan from the cabinet. This has been linked to Mr Gordhan reining in a great deal of government spending.
 
Since South Africa cannot have a sitting minister with criminal charges against them, if Mr Gordhan is found guilty, he will be forced to leave the government.
 
Speaking in Kenya, Mr Zuma said: “Our society is anchored on the rule of law as well as fair and just judicial processes. In this regard, minister Gordhan is innocent until and unless proven otherwise by a court of law. This is a fundamental pillar of our constitutional democracy and the rule of law.”
 
The troubles with the position of finance minister are not new to South Africa. In December 2015, Mr Zuma sacked Nhlanhla Nene, who had been in the position since May 2014. Mr Nene was replaced by David van Rooyen, who was in the post for just three days. He was then replaced by Mr Gordhan, who has remained finance minister until the present.
 
During that week, when three different finance ministers were appointed, the currency dropped significantly, something that is happening again now.
 
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