By Stella Mapenzauswa
JOHANNESBURG (Reuters) - South African police said on Tuesday finance minister Pravin Gordhan may face legal action for not cooperating with an investigation of surveillance by the revenue service, escalating a public row and rattling the rand and bonds.
In a tussle that has raised concern about the direction of policy in Africa's most industrialized but ailing economy, Gordhan hit back, accusing police of threatening him.
The elite Hawks police unit said it would exercise its "constitutional powers" after Gordhan missed a second deadline to answer questions about a suspected spy unit established while he was head of the South African Revenue Service (SARS).
Gordhan has repeatedly called the investigation a smear campaign aimed at tarnishing his and the Treasury's credibility and has said he would take legal action to protect himself.
In a strongly worded statement, the Hawks said Gordhan had failed to meet a March 14 deadline to answer questions.
"This is neither a talk-show nor a soapie. We are mandated to investigate without fear, favor or prejudice," the unit added, resorting to capitals to make its point.
"The minister, for whatever reasons, has failed to meet the SECOND deadline for answering questions and our legal team are forging a way forward which will see the Hawks exercising our constitutional powers.
"The investigations will not be stalled by an individual who refuses to comply with the authorities and demand a preferential treatment," the statement added.
In response, the Treasury said it was "factually incorrect" that Gordhan had failed to respond to a second letter, reiterating he had not received one.
"Notwithstanding that the Hawks have not responded to the minister's lawyers' representations for further clarity, the minister has nonetheless instructed his legal team to prepare an adequate response," it said.
RAND, BONDS TUMBLE
The rand fell more than three percent to 16.0400 per dollar after the Hawks statement. Government bond yields jumped more than 30 basis points.
"Investors are realizing the fight is real," Nomura emerging market analyst Peter Attard Montalto said. "Both sides are doubling down, and at some point one side will hit the nuclear button."
Gordhan has said he could not answer questions before an initial deadline set by the Hawks because he was busy preparing the 2016 budget. On Monday, he told a news conference he had only read about a second letter in a weekend newspaper.
He criticized the leaking of the document to the media, an accusation the Hawks did not deny or confirm in their statement.
Appointed in December to calm investors spooked when President Jacob Zuma abruptly switched finance ministers, Gordhan had previously served as finance minister from 2009-2014.
He was head of SARS from 1999-2009. During that time, the unit that allegedly conducted illegal surveillance of taxpayers was set up, investigating authorities say.
Last week, Gordhan met investors and credit rating agencies in London and New York, seeking to drum up support for South Africa, which is at risk of losing its investment-grade status because of slow growth and big deficits.
"This is absolutely the last thing South Africa needs right now. The economic backdrop is challenging enough; no need to top it off with more political drama," Anne Fruhauf, a Southern Africa analyst for Teneo Intelligence, told Reuters.
South African Police Minister Nkosinathi Nhleko has said the questions put to Gordhan by the Hawks do not mean he is under investigation for a crime or will be charged.
Zuma said last month he had full confidence in the finance minister and dismissed "rumors and gossip which insinuate some conspiracy against minister Gordhan".
But the latest skirmishes could hurt Pretoria's efforts to avert a credit downgrade. Standard & Poor's and Fitch already have the country just one notch above junk status. Moody's said last week it would put South Africa's Baa2 rating, two levels above sub-investment grade, on review for downgrade. It is due in the country this week.
"This is not a great time to remind Moody’s of the civil war going on inside the government," Capital Economics Africa analyst John Ashbourne said.
(Additional reporting by Tiisetso Motsoeneng and Mfuneko Toyana; Writing by James Macharia and Stella Mapenzauswa; Editing by Larry King)