Nkandla ruling pleases market

Thursday’s Constitutional Court ruling will undoubtedly encourage foreign investors, whose confidence in the independence of South Africa’s institutions was deeply shaken after former finance minister Nhlanhla Nene’s unceremonious removal in December.

The highest court in the land asserted its independence in no uncertain terms when – in what can only be described as a magnificent judgement – it ruled against President Jacob Zuma and the National Assembly on the Nkandla matter.

Delivering a unanimous ruling on behalf of ten Constitutional Court judges, Chief Justice Mogoeng Mogoeng found that President Jacob Zuma failed to uphold, defend and respect the Constitution after he did not comply with the “binding remedial action” ordered by the Public Protector, Thuli Madonsela, in relation to paying back some of the R246 million spent on upgrades to his Nkandla homestead.

The Chief Justice also ruled that the National Assembly failed to fulfil its constitutional obligation to hold the President accountable by facilitating the enforcement of the Public Protector’s findings.

“Zuma did not challenge the [Public Protector’s] report through a judicial process. He appears to have been content with the apparent vindication of his position by the [police] minister’s favourable recommendations and considered himself to have been lawfully absolved of liability,” he noted.

The Chief Justice described the Public Protector as the “embodiment of a biblical David”, laying out her office’s sweeping investigative powers under the Constitution, which he said are “not supposed to bow down to anybody‚ not even at the door of the highest chambers of raw State power”.

Mogoeng ruled that National Treasury must determine a reasonable percentage of costs that should be repaid personally by the President and report back to the court within 60 days.

Confidence restored?

The rand immediately rallied on the news, coming closer to levels last seen before December 9, when Nene was removed from office.

Certainly, the gravity of the judgement, the uncompromising conviction with which it was delivered and the fact that it was unanimous, will send a strong message to international investors.

That South Africa is a constitutional democracy with an independent judiciary and free media, is a significant positive for the country in the eyes of foreign investors.

Arguably, this is what sets us apart from many other emerging markets.

Tragically, the shock sacking of Nene shook to the core the confidence of foreign investors in South Africa’s state institutions.

Before ‘Nenegate’, foreign investors seemed quite willing to ignore much of the political noise in the country in the knowledge that institutions such as National Treasury and South African Reserve Bank (Sarb) remained independent.

The events of December 9 deeply undermined this.

The number of political questions – including around Nene – asked of finance minister Pravin Gordhan and others by foreign investors on a recent international road show, underscored that this is true.

Briefing media following the investor road show, Sarb deputy governor Daniel Mminele said that he had to allay foreign investor fears around central bank independence.

Reserve Bank governor Lesetja Kganyago stressed at its Monetary Policy Committee (MPC) meeting earlier this month, that the Sarb’s independence is “enshrined in the Constitution”.

Acknowledging that a fair amount of credibility has been won back following the ruling, Mohammed Nalla of Nedbank Capital cautions that a “nascent degree of scepticism” exists in conversations with international investors.

“Where previously they were very willing to give South Africa the benefit of the doubt, now it’s almost a ‘wait and see’ game. Today’s developments are very positive, but international investors are not going to run storming into SA saying ‘yes, it’s a sound investment case’. They’re going to want to see what is the actual outcome now as the process is followed,” says Nalla.

Banking Association of South Africa (Basa) MD, Cas Coovadia highlights the ruling’s importance to foreign investors and ratings agencies in that the credibility of state institutions impacts significantly on the country’s ability to attract and retain foreign direct investment.

The ruling holds the President accountable, indicating he is not above the law, which is important for the image of the country portrayed to international investors, adds Francois van der Merwe, head of offshore investments at Novare.

“Although it will help to improve foreign investor confidence towards South Africa, it does not alter the probability of a credit rating downgrade later this year,” Van der Merwe says.

Structural economic reforms, including to the labour market, are needed to keep ratings agencies at bay, Nalla adds.

Brought to you by Moneyweb