Gordhan’s summons by South African prosecutors deepens Zuma rift

South African Finance Minister Pravin Gordhan was summoned to appear in court on fraud charges next month, the latest twist in a struggle with President Jacob Zuma that could cause South Africa’s credit rating to be downgraded to junk. The rand weakened against the dollar by the most in more than three months.

Gordhan Tuesday called the summons politically motivated and said “there is no case,” adding that South Africans need to ask why the prosecutors took the decision to charge him over approving a retirement package, two weeks before the delivery of the mid-term budget. He’s due to appear in court on Nov. 2.  Shaun Abrahams, the head of the National Prosecuting Authority, said there had been no political interference.

“Gordhan has done an outstanding job and enjoys an extremely high degree of confidence,” said Anthony Sedgwick, co-founder of Abax Investments (Pty) Ltd. “Obviously, there is extremely deep suspicion as to what the motive behind the move is.”

The finance minister has led efforts to help South Africa keep its investment-grade rating and is seen by international investors as a steady hand to guide the economy through the slowest growth since a 2009 recession. The Treasury’s pledge to keep spending under control and limit debt was cited as crucial for S&P Global Ratings and Fitch Ratings to avoid a cut to junk.

Investor Concern

“It’s a grave concern and investors are unlikely to react kindly to this development,” Jana van Deventer, an analyst at ETM Analytics in Johannesburg, said by phone. “It’s a reminder to investors of the political instability that’s been playing out in South Africa, especially related to National Treasury.”

Gordhan will be charged with fraud related to his approval during a first stint as finance minister from 2009 to 2014 of the early retirement and subsequent reappointment on a contract basis of a former colleague at the revenue service that resulted in a “fruitless” expenditure of 1.1 million rand ($77,000), Abrahams told reporters in Pretoria, the capital.

“I can assure you there has been no political interference in this matter,” he said. “I will not allow any political interference in the work of this institution. This decision was made within the rule of law and the constitution.”

Zuma Battles

Gordhan has repeatedly clashed with Zuma, who had dismissed his request to fire the nation’s current tax chief, Tom Moyane, for insubordination and delayed his attempts to install a new board at the loss-making state airline. Prosecutors have alleged that Gordhan oversaw the establishment of an illicit investigation unit when he was commissioner of the South African Revenue Services. The minister was reappointed in December, days after Zuma’s decision to fire widely respected Nhlanhla Nene and replace him with a little-known lawmaker caused the rand and bonds to plunge.

Public Protector Thuli Madonsela questioned Zuma last week relating to her investigation into whether the Gupta family, who are friends with the president and in business with his son, had undue influence over government affairs. Zuma on Monday responded that he wanted to question the witnesses who the graft ombudsman had interviewed, and wants the investigation handed over to her successor after she steps down on Oct. 15.

The Constitutional Court ruled in March that Zuma violated the law by not abiding by Madonsela’s recommendation that he repay some taxpayer money that was spent on upgrading his private home, and ordered him to comply.

Counter-Reaction

“What we have seen since December last year is that whenever there’s a major threat to either President Zuma or to persons close to him, then he activates this challenge or threat of Pravin Gordhan’s involvement at SARS,” said Dirk Kotze, a politics professor at the University of South Africa. “It becomes his main form of counter-reaction and form of bargaining in order to get rid of those issues when they are raised.”

Zuma’s spokesman, Bongani Ngqulunga, didn’t respond to calls and a text message seeking comment.

Jackson Mthembu, the ruling African National Congress’s chief whip in parliament, said he supported Gordhan.

“While I do respect the processes of the law, I say that he is an honest man and a disciplined and loyal cadre of the ANC,” he told reporters in Cape Town. “We will be with him, some of us, all the way to accompany him to court.”

The rand weakened as much as 3.6 percent against the dollar and was 3.4 percent lower at 14.2795 as of 2:40 p.m. in Johannesburg, the worst performer among 24 emerging-market currencies tracked by Bloomberg. Five-year credit default swaps, an indication on political risk, climbed 18 basis points to 267, the highest level since July 7.

Abrahams said the probe into the allegedly illicit investigative unit is “at an advanced stage but remains incomplete and ongoing.”

“The timing is clearly unfortunate ahead of the rating decision and the mid-term budget policy statement in a few weeks time,” Mike Davies, an analyst with Kigoda Consulting in Cape Town, said by phone. “It will place South Africa’s institutional independence under further scrutiny. The case could be used by President Zuma to reshuffle his cabinet, which is seen as one of the key motives for the campaign against Gordhan.”

-Bloomberg