For a while after the local elections in August, it looked like the South African rand had finally reversed out of its downward path and had turned a corner. Foreign investors were optimistic that the beating the ANC took at the polling booths would translate into improved economic decision-making. But then news emerged that the Hawks unit, a controversial investigative squad, was moving in on South Africa’s finance minister Pravin Gordhan, sending the national currency downwards. With the Hawks acting beyond its powers and the range of charges against Gordhan legally questionable, the case against the finance minister looks to many like it has been designed to remove him from his seat at the controls ofSouth Africa’s state funds. With the Zuma and Gupta families – referred to as the Zuptas because their affairs are intertwined – emerging as players in a range of controversial transactions that would be of interest to Gordhan in his capacity as finance minister, it has seemed clear to observers that there is a political battle between President Jacob Zuma and Gordhan. For investors, in South Africa and elsewhere, the clash is creating uncertainty around how the country’s affairs are being managed and what the future is likely to hold. Investors are notoriously uncomfortable with uncertainty.Futuregrowth Asset Management, a large money manager in South Africa, was the first to halt lending to South Africa’s state-owned enterprises, with international asset managers also starting to withdraw over “governance” issues this week. Meanwhile, the country could soon face a credit rating downgrade to junk. A weaker rand, meanwhile, is expected to feed into higher inflation, which in turn suggests interest rate hikes and therefore higher debt repayments are likely for consumers. In all, the Zuma vs Gordhan battle is likely to take its toll on South Africa’s hard-working taxpayers, who are also seeing their contributions to state coffers frittered away in the name of personal enrichment. Many are calling for a tax boycott to force the government to get its house in order. – Jackie Cameron

By Xola Potelwa, Mike Cohen and Liezel Hill

Denmark’s Jyske Bank AS became the second money manager to say it won’t lend to South Africa’s Eskom Holdings SOC Ltd.’s after the nation’s biggest specialist fixed-income manager said it had stopped extending credit to state-owned companies amid concern about their governance.

“We pulled the plug on Eskom too yesterday,” Rune Hejrskov, senior money manager at the Silkeborg, Denmark-based company said Thursday in e-mailed comments. “I could easily see more lenders follow suit. We see issues on lending going forward and more governance issues.” 

Hejrskov, who helps manage about $1.3 billion at Jyske Bank, said he moved to being underweight in power company Eskom’s bonds from mediumweight. Futuregrowth Asset Management, with $11.7 billion in assets, told Bloomberg Wednesday it shelved plans to lend more than 1.8 billion rand ($123 million) to three state companies this week, citing concerns about how they are being run.

‘Governance Issues’

Finance Minister Pravin Gordhan has been at loggerheads with President Jacob Zuma over the minister’s calling for the firing of the nation’s tax chief for insubordination and the replacement of the board of the loss-making state airline. The Treasury has also clashed with Eskom about its efforts to review coal-supply contracts with a company linked to the Gupta family, who are friends with Zuma and in business with his son. Questions over governance at Eskom may increase, said Hejrskov.

“I see no other way, with the discord between Zuma and Finance Minister Gordhan, more and more governance issues showing up, Gupta family having a much larger influence than previously expected,” he said.

Yields on Eskom’s $1.25 billion of bonds maturing in 2025, which jumped by the most since February on Wednesday, dropped 4 basis points to 7.17 percent by 12:17 p.m. in Johannesburg (Thursday).

The government said last week that Zuma will lead a new panel to oversee all state-owned companies to ensure they help develop the country, a role previously delegated to Gordhan and other ministers. Gordhan has refused a request to report to police for questioning as part of an investigation by a special unit into alleged irregularities at the South African Revenue Service, which he ran from 1999 to 2009. While Gordhan has denied any wrongdoing, there is speculation he may be arrested and removed from his post.

Old Mututal Plc, South Africa’s biggest private money manager which owns Futuregrowth, said the unit’s decision did not represent the broader views of the company.

‘Investment Performance’

“We respect the independence that fund managers need to deliver investment performance for clients and believe that a more constructive model of engagement is needed and necessary to build and increase socio-economic development and drive financial inclusion in our country,” Ralph Mupita, the chief executive officer of Old Mutual’s Emerging Markets unit, said by e-mail. “Old Mutual remains committed to our existing commercial relationships and public-private partnerships with state-owned enterprises.”

The ruling African National Congress said it was concerned by Futuregrowth’s actions, and that the generalization that state-owned companies were beset by corporate governance challenges was erroneous and unfortunate.

“Where there are challenges, these have been identified and, amongst others, interventions made to strengthen these institutions,” the party said in a statement. “We believe that Futuregrowth, or any other investor, should await the outcome of these interventions before taking any preemptive stance.”

Rand volatility and the Zuma vs Gordhan battle

The rand gained against the dollar for the first time in 10 days and South African bonds rose as figures from China showing a pick-up in manufacturing boosted commodity prices.

The South African currency was 0.4 percent stronger at 14.6680 by 10:07 a.m. in Johannesburg. The rand recovered some of its 1.6 percent slump on Wednesday, caused partly by the country’s biggest specialist fixed-income money manager, Futuregrowth Asset Management, saying it would stop lending to six state companies because of governance concerns. The rand lost 5.8 percent in August as speculation mounted that Finance Minister Pravin Gordhan may be replaced as part of an investigation by a special police unit.  

The rand “should try and stabilize at these higher levels but the sentiment is such that negative local news flow could easily set off another run higher,” John Cairns, strategist at Rand Merchant Bank, said in an e-mailed note. “Futuregrowth’s decision to cut off fresh lending to certain SOEs highlights the private sector’s uncertainty over the political situation. It also, likewise, ratchets up the pressure in the Hawks-Gordhan saga.”

The rand’s retreat against the dollar last month was the worst performance among 31 major and emerging market currencies tracked by Bloomberg. While the rand has dropped in August for 16 of the last 20 years, it has advanced in September 12 times in the past two decades. Yields on benchmark government bonds due December 2026 dropped 3 basis points to 9.04 percent after rising 42 basis points in August. 

Gordhan’s legal battles

South African Finance Minister Pravin Gordhan cooperated fully the police on the probe into the investigative unit that he set up when he led the state tax agency, according to his lawyers.

The minister has denied any wrongdoing and decided not to present himself at the offices of the Hawks special police unit on Aug. 25 to make a warning statement because he wasn’t required to do so by law, Gordhan’s legal team, Gildenhuys Malatji, said in an e-mailed statement on Thursday. Gordhan, 67, responded to the inquiry in a statement and had offered further assistance to the investigating unit.

“The assertions of law on which the Hawks based their accusations against the minister were wholly unfounded and indeed scurrilous,” the lawyers said. It was “absurd to invite the minister to make a warning statement. He had already given a full account of his side of the story.”

Gordhan’s fate is now in the hands of the National Prosecuting Authority, which has received a docket from the Hawks. President Jacob Zuma has been at loggerheads with the minister over Gordhan’s requests to fire the nation’s tax chief for insubordination and to replace the board of the loss-making state airline. The political turmoil has put the nation’s investment-grade credit status at risk.

The “handling of the matter seemed to have been designed to trigger a media event to humiliate the minister,” the lawyers said. “The minister has thus scrupulously obeyed the law at all times. He has fully co-operated with the Hawks.”

While African National Congress Secretary-General Gwede Mantashe urged Gordhan to cooperate with the police investigation, he also criticized the way the police handled the case.

‘Feels like showdown at high noon’ – analyst

As South African Finance Minister Pravin Gordhan tries to fend off a police investigation, his department is engaged in open conflict with key state-owned companies over their management and spending plans.

Threatened court action by the National Treasury to stop a joint venture in Asia by Denel SOC Ltd. is “political, sheer opportunism and grandstanding,’’ the state arms maker said in a statement Tuesday. On Monday, utility Eskom Holdings SOC Ltd. said it was “shocked and perplexed’’ after the department said the power producer was resisting a review of its contracts.

“There’s no question that the companies feel emboldened by the fact that Pravin Gordhan is apparently facing charges,” said Nic Borain, a Cape Town-based political analyst and adviser to BNP Paribas Securities South Africa. “It feels like a showdown at high noon and it’s not a situation that the country can have continue.”

The escalating disputes cap almost two weeks of political and market turmoil after reports Gordhan could face arrest and amid speculation by analysts and opposition parties that President Jacob Zuma may use the police investigationto install a more compliant Treasury head. The Eskom contract probe and Denel’s Asian joint venture involve companies with ties to the Gupta family, who are friends with Zuma.

The Treasury declined to comment publicly on Denel’s statement, it said by e-mail.

SAA Stalemate

In another long-standing dispute, Gordhan is locked in a stalemate with national flag carrier South African Airways,chaired by Dudu Myeni, who is also the head of Zuma’s foundation. The unprofitable airline needs further loan guarantees from the government, which the finance minister has refused to sign.

Gordhan was appointed in December, after Zuma’s decision to replace Nhlanhla Nene in the post with a little-known lawmaker sparked a sell-off in the rand and nation’s bonds. While the president said last week he supports Gordhan, he said he has no authority to stop the police probe. Gordhan was ordered last week to report to a special police unit investigating alleged irregularities at the tax authority, which he headed from 1999 to 2009. He refused, saying he had done nothing wrong.

The perception of poor economic management and oversight at some state-owned companies is a threat to South Africa’s credit rating at a time when the country is seeking to stave off a downgrade to junk in December, said Razia Khan, head of Africa macro research at Standard Chartered Plc in London.

“Part of that credit rating is that there is transparency and that the institutions are strong,” she said. “Clearly for some time now, there has been reason to doubt that that is the case at a number of SOEs,” she said, referring to state-owned enterprises.

Futuregrowth Asset Management, the continent’s biggest private fixed-income money manager, will stop lending money to six of South Africa’s largest state companies because it’s concerned about how they are being run, government infighting and threats to the independence of the Finance Ministry, Chief Investment Officer Andrew Canter said.

Futuregrowth’s announcement doesn’t place Eskom’s funding plan at risk and the utility has already raised more than 57 percent of the 69 billion rand ($4.7 billion) it requires for the year ended March 2017, it said in an e-mailed statement Thursday.

Authority Limits

That Treasury has to resort to legal action to prevent the Denel deal is also an indication of the limits on Gordhan’s authority, Theo Venter, a political analyst at North West University in Potchefstroom, near Johannesburg, said by phone on Wednesday.

“The battle lines are drawn closer and closer and clearer and clearer,’’ he said. Gordhan is “under political siege,’’ Venter said, and the pressure on him is “getting stronger by the day.’’

The Treasury is presenting itself as a “countervailing force” in the government against an agenda tainted by corruption and patronage, said Borain, the adviser to BNP. “If that is the correct read, that has got to be resolved, and it can only be resolved in two ways: either the exposing and expelling of that agenda, or the exposing and expelling of Pravin Gordhan.”