Ruling Party in Disarray Over Covid-19 Corruption

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SOUTH AFRICA: 01 September 2020 RULING PARTY IN DISARRAY OVER COVID-19 CORRUPTION

A stream of allegations of COVID-19-related corruption has shocked the ruling party and undermined confidence in the government of President Cyril Ramaphosa. The president now faces a challenge from within his own party to remove him early next year and a cabinet reshuffle is imminent. In the meantime, political manoeuvring and graft probes will distract from the coronavirus response, reform of state-owned enterprises, and negotiations with the IMF to avoid a sovereign debt crisis.

On 28 August, South Africa?s former president Jacob Zuma accused current President Cyril Ramaphosa of bringing into disrepute the governing African National Congress (ANC) party with his stance against corruption. Zuma?s statement, which is the first time he has publicly rebuked his successor in over two years, came in response to Ramaphosa?s letter to ANC members blaming its leaders for extensive corruption and fraud in the procurement of coronavirus personal protective equipment (PPE). In his letter, Ramaphosa told the party that it stands as ?accused number one.? While the president has survived a recent challenge to his leadership, rival factions in the party are moving to seek his removal from office early next year.

EXX AFRICA - SOUTH AFRICA: RULING PARTY IN DISARRAY OVER COVID-19 CORRUPTION Meanwhile, following a conference of the ANC?s top decision-making body on 29 and 30 August, Ramaphosa has been referred to the party?s integrity commission to probe allegations of misleading the country?s parliament about campaign donations he received while running for the ANC leadership in 2017. The integrity commission investigation is the first step by Zuma loyalists in the party to attempt to remove or ?recall? Ramaphosa at the ANC National General Council (NGC) due early next year. Over the next few months, rival factions in the ANC will use corruption allegations and investigations as leverage to build up their political constituency ahead of the party?s NGC. Several party leaders are also manoeuvring to replace Ramaphosa in case he is recalled next year.

The political deadlock and seemingly endless flow of corruption evidence and allegations will weaken the government?s approach to battle the coronavirus outbreak ? South Africa has the world?s fifth highest number of confirmed infections. The political crisis also undermines the government as it seeks to revive a battered economy that may shrink more than 7 percent this year, and halt any plans for economic restructuring and reform of debt-laden state-owned enterprises that drive the greatest risk of sovereign default for Africa?s most industrialised economy. The widespread corruption will also complicate South Africa?s negotiations with the International Monetary Fund (IMF) for a bailout, which is becoming increasingly urgent as the country?s sovereign debt crisis escalates (See SOUTH AFRICA: IMF LOAN IS JUST A START OF FUTURE BORROWING REQUIREMENTS). EXX Africa assesses the recent corruption allegations and forecasts the risk implications of the political bickering towards 2021.

Coronavirus corruption: ?unforgivable betrayal?

Over the past month, a series of corruption scandals have been breaking involving high-ranking ANC members or their partners profiting from lucrative tenders with provincial and local government health departments, particularly for the provision of PPE. So far, the extent of COVID-19-related fraud is estimated at almost USD 300 million and has triggered a spate of arrests and asset seizures. In early August, President Ramaphosa appointed a ministerial committee to probe the irregular awarding of tenders for PPE. Two days later, South African courts froze the assets of 44 individuals and companies.

The extent of the fraud is staggering and implicates the families of senior ANC members, such as former environment minister Nomvula Mokonyane, who was appointed to that post by Zuma, and ANC Secretary-General Ace Magashule, who now effectively leads the Zuma faction. Ramaphosa?s own allies have also been implicated, including his former spokesperson Khusela Diko and the president?s own son, Andile Ramaphosa. Gauteng province, which includes major cities like Johannesburg, awarded a contract to SDI Force, a ?non-profit? company owned by Andile to make modifications to taxis to reduce the risks of virus transmission for passengers and drivers (See SOUTH AFRICA: CORRUPTION AND LACK OF REFORM IMPAIR POST-PANDEMIC OUTLOOK).

In response, President Ramaphosa has called the corruption an ?unforgivable betrayal? in a letter to ANC members. The country now has the fifth highest number of COVID-19 infections in the world, even though its

EXX AFRICA - SOUTH AFRICA: RULING PARTY IN DISARRAY OVER COVID-19 CORRUPTION population is far smaller than other countries in the top five ranking such as India and Brazil. Impoverished and crowded urban areas in South Africa have become a hotspot for the disease, particularly in the commercial hub of Gauteng, which includes three major cities with a total population of 15.5 million people, and rural KwaZulu-Natal province.

South Africa is not the only African country that has been affected by embezzlement of coronavirus relief funds and fraudulent procurement of PPE and other tenders. There is mounting evidence of such corrupt practices across southern Africa, Central, and East Africa. While governments across the continent are ramping up their resources to battle the virus, evidence of state corruption is becoming more prevalent and causing public outcries.

The case against Ramaphosa

The pandemic in South Africa has seen a notable loss of confidence in the government and the biggest fall in support for the ruling ANC party since it came to power 26 years ago. The initial lockdown was widely supported by the political opposition but then evolved into an unseemly tangle of contradictory rules and exemptions that pushed South African cynicism about politics to an all-time high. The government?s National Coronavirus Command Council gave in to pressure from unions, particularly taxi and teachers unions that removed any sensible level of social distancing in public transport while keeping many schools shut despite contrary advice from medical advisers. Meanwhile, the government has refused to divulge the scientific advice it has received on schools and other matters, despite widespread leaks from its advisers.

The extent of the coronavirus fraud and state corruption implicating Ramaphosa?s own faction and family has triggered an outcry from ANC party luminaries, including the Ahmed Kathrada, Nelson Mandela, and Desmond and Leah Tutu foundations. Religious organisations, civil society, and business bodies have teamed up in their criticism of Ramaphosa?s leadership (or perceived lack thereof) of the government and ANC. In response, the president has launched a vocal attack on those accused of corruption in the government and he has called his own party 'Accused Number One'. On 31 August, Ramaphosa said the party?s NEC would expel

EXX AFRICA - SOUTH AFRICA: RULING PARTY IN DISARRAY OVER COVID-19 CORRUPTION and remove from office all party officials formally charged with corruption and other serious crimes. This would include the ANC?s most senior leaders. A cabinet reshuffle is imminent and is likely to remove more Zuma loyalists from the government and dismiss those implicated in graft scandals.

Despite the internal party disputes in the ANC, the opposition has failed to capitalise on the scandals within the ANC. The main opposition Democratic Alliance (DA) is riven by its own internal divisions, many on racial and ideological lines. The radical leftist Economic Freedom Fighters (EFF) has opposed the reopening of the economy, unlike the DA, but its leadership has also faced high profile allegations of corruption and fraud. Despite a massive loss of political support, Ramaphosa remains unchallenged as his main opponents within the ANC, such as Magashule, are tarnished by corruption scandals. His other rival and deputy party and national president, David Mabuza, has fallen seriously ill (some media reports suspect due to poisoning) and remains out of the limelight. Cooperative Governance and Traditional Affairs Minister Nkosazana Dlamini-Zuma, who leads the Command Council, remains allied to Ramaphosa at least for now and has been widely discredited by the government?s bungled response to the economic reopening. A potential challenger to Ramaphosa, who may emerge ahead of the NGC next year, is his former ally and ANC party treasurer Paul Mashatile, who has fallen out with the president.

The case against the ?Zuma faction?

Under attack from his own party, Ramaphosa is hitting back hard against the Zuma faction. The National Prosecuting Authority is due to charge a major political figure involved in the theft of USD 13 million of state funds from the Estina Dairy project in the Free State in a scandal dating back almost a decade. ANC Secretary General Ace Magashule is the prime suspect in the case. Magashule can only be removed from his party position before late 2022 if he is indicted in a corruption case.

Meanwhile, the government is accelerating prosecutions of the beneficiaries of so-called 'state capture' under Jacob Zuma. The Special Investigation Unit (SIU) has launched a civil suit to recoup an initial USD 225 million from former executives of debt-stricken electricity utility Eskom. Arrests of senior executives state-owned enterprises are being lined up, including at Eskom and state-owned transport and logistics company Transnet. Zuma's own trial on multiple counts of grand corruption is continuing in his home province of KwaZulu-Natal.

The economic cost of ?loadshedding?

An additional concern for the South African government is the frequent power cuts, known locally as ?loadshedding?, by ailing state power utility Eskom that have hobbled investor confidence in the country?s economy. Recent analysis by South Africa?s Council for Scientific and Industrial Research (CSIR) found that 1,352 Gigawatt hours (GWh) of energy had been shed in 2019, costing the economy an estimated USD 7.2 billion. So far this year according to the CSIR, 1,498 GWh have been shed, thus exceeding last year?s record in the first eight months of this year. The cost to this year?s economy will add to the loss of economic activity during the country?s nine-week hard lockdown from May to June.

The Organisation for Economic Co-operation and Development (OECD) has called for urgent reforms to diversify power generation and invest in renewable sources of energy. However, none of

EXX AFRICA - SOUTH AFRICA: RULING PARTY IN DISARRAY OVER COVID-19 CORRUPTION the promised restructuring initiatives proposed by Ramaphosa have been implemented. The government has proposed an ??urgent economic recovery programme??, known as the ?Economic Reconstruction, and Recovery Plan?, to ensure rapid economic recovery after the pandemic.

However, the plan is short on detail, lacks a clear timeline, and is indicative of the ruling ANC party?s indecisiveness on policy formulation. Some aspects of the plan mirror the OECD?s recent recommendations, such as implementing price and market regulatory changes, yet there is no detail on how such reforms would be implemented given strong factional resistance within the ANC against such market-based reforms, as we highlighted in a special report in June (See SPECIAL REPORT: THE ?BATTLE? FOR SOUTH AFRICA).

INSIGHT

The political fallout over state corruption has had a serious impact on South Africa?s investment risk outlook. On 312 August, South Africa?s rand currency weakened by more than 2 percent, the most in more than two months after President Cyril Ramaphosa had to stave off a leadership challenge from party rivals opposed to his efforts to curb corruption and implement economic reforms. South Africa lost its last investment-grade credit rating when Moody?s Investors Service downgraded its assessment in March. That added fuel to a selloff of the country?s bonds, with net outflows reaching a record of USD 3.5 billion on 28 August. South Africa has been ranked as the world?s most miserable economy after Venezuela and Argentina, according to Bloomberg?s Misery Index, which ranks major economies by inflation and unemployment expectations. While the local inflation rate of around 2.2 percent is the lowest in 15 years, the unemployment rate has pushed above 30 percent and could reach 50 percent given the deep economic depression. Government estimates that between 3 and 7 million people could lose their jobs this year. Income inequality is the most distorted globally.

Other indicators show a similarly negative picture. The fiscal deficit is set to balloon, and the deficit will probably double the 1992-93 record deficit of 7.2 percent of GDP this year. The bond market shows yields on two-year bonds at 4 percent and 10-year bonds at almost 10 percent ? making for one of the steepest bond curves globally. The South African Reserve Bank?s (SARB) business cycle indicators show the co-incident indicator falling by 26.8 percent year-on-year ? the largest decline since records began in 1960. In terms of investment spending as a share of GDP, the country?s competitiveness shows a similar deep sag. The latest value for the first quarter of 2020 is 12.8 percent ? a long way off the global average (based on 150 countries) of 24.3 percent.

The battle over South Africa?s political direction has been kicked off with the now approved IMF financial support through the recent loan. Any subsequent IMF loan programmes would be tied to conditionalities such as already contested public payroll cuts, austerity budgets, and partial privatisations, as well as enhanced transparency and investor protections. Such conditions are anathema to much of the leadership of the ruling ANC party which fears loss of sovereignty and a dilution of its patronage networks that were expanded under former president Jacob Zuma. Opponents of current President Cyril Ramaphosa are playing out the ideological divisions in the governing alliance to mobilise support for a challenge against the embattled president. Ramaphosa has pushed back the timeline for a potential leadership contest this year, yet he faces an array of political opponents within the ANC, labour unions, activists, and even the usually favourable business community.

EXX AFRICA - SOUTH AFRICA: RULING PARTY IN DISARRAY OVER COVID-19 CORRUPTION