Political unrest backfires on South African economy

Political unrest in South Africa seems to be infecting the economy. The South African rand has lost value in recent months. The cause of the sudden change seems to be the president Zuma. Zuma has had a number of suspicions of corruption surrounding his person, he also switched his Minister of Finance twice in a week, which hit the share market. What is going on in South Africa?

There are three problems negatively influencing the political situation in the country and with it the economy. First of all is the Nkandla scandal. Last summer the president was accused of having used tax payer money to fix up one of his villas. The president denied that tax payer money was used in parliament. The South African newspaper Sunday Times recently published an overview which showed what part of the rebuilding was financed from the state purse. According to the newspaper it concerns air conditioning, fittings and the decoration. In earlier reports there was talk of 13 million pounds that the president invested in his villas. The whole situation is causing the ANC, Zuma's party, embarrassment.

President Jacob Zuma answers questions in parliament. photo: GovernmentZA

In December last year president Zuma switched his Minister of Finance twice in five days. The generally respected minister Nhlanhla Nene was pushed aside and replaced by David van Rooyen. The stock exchanges responded with panic, a few billion evaporated on the exchange floor and there was fear of a further drop in the country's 'credit rating'. A further drop in the credit rating could cause South Africa payment problems. Four days after Van Rooyen's appointment he too was moved aside to make space for Pravin Gordhan, who held the position of minister between 2009 and 2014.

The sudden game of musical chairs in the cabinet caused protests throughout the country. Although demonstrations against the social conditions in the country are nothing new, these protests increasingly turned against corruption. The call for president Zuma to leave swelled in these protests.

The situation took another turn when the Secretary of State of Finances announced that he had been offered the post of minister by a rich Indian business family. Due to the close ties between president Zuma and this Gupta family the integrity of the president was questioned.

The Euro/Rand exchange rate. source: www.wisselkoers.nl

The Gupta family is said to control the strings of the country. Family friends are said to hold important positions in the country and the relationship between president Zuma and the family is too close according to some. Reports say that after the announcement that the secretary of state had been offered a promotion by the family, the former director of Eskom, the state electricity company, stated that his resigning had been prompted by the family. According to Zola Tsotsi, the former director, he was called by the Gupta family, who forced him to give up his job.

Minister Ramatlhodi also spoke out about his ties to the family when he was Minister of Mineral Materials. He denied, resigned and was succeeded by an inexperienced Mosebenzi Zwane, a friend of the Gupta family.

The exchange rate responded to all these political tensions. A recent example is the drop earlier this month, caused by a conflict between the minister of Finance, Pravin Gordhan, and a police investigation in the South African Revenue Service, which was led by the minister ten years ago. These direct responses in the exchange rate caused the downward spiral that the South African Rand has continued.

The economic prospects of the country have also been adjusted down. A growth of 0.9 percent is expected this year, last year the economy grew by 1.3 percent. The growth estimate is still too high according to some experts. The cause of the lower economic growth is, besides the political unrest, in the drought that has hit the country. This has decreased the export of agricultural products. The inflation is also rising, to an expected 8.1 percent in December this year. In the first two months of this year the inflation was already above the target line set by the central bank.