Reshuffle aftermath: Rand tanks as experts warn worse still to come

Days after President Jacob Zuma took one of the biggest political gambles of his career and sacked his market-friendly Minister of Finance Pravin Gordhan, the currency markets have started to react in a big way. Despite new finance minister Malusi Gigaba’s efforts to calm the rating agencies over the weekend, the market clearly still thinks that South Africa is at risk of getting a credit rating downgrade judging by the rand’s performance this morning. And as experts say in this Fin24 piece, the situation could get much worse. In the meantime, life for South Africans risks getting more expensive as the rand tanks and the prospect of junk status and a future of soaring interest rates loom large. Will the ANC step in and boot out its ‘Number One’, or will it continue to lurch from one crisis to the next, dragging South Africa down with it? – Gareth van Zyl.

By Matthew Le Cordeur, Fin24

UPDATE: The local currency is taking a beating, losing almost 2% to trade dangerously close to R13.70 to the US dollar. By 10:50 the rand was trading at R13.68/$.

Cape Town – The rand weakened sharply by more than 1% on Monday morning as an analyst warned traders to prepare themselves for “big moves up and down”.

South African money (Rand) bank notes sit in this arranged photograph in Pretoria, South Africa. Photographer: Waldo Swiegers/Bloomberg

The warning by Umkhulu Consulting analyst Adam Phillips on Monday came as economic uncertainty intensified following the removal of finance minister Pravin Gordhan and deputy minister Mcebisi Jonas from their posts last Thursday.

Policy uncertainty, the risk of a ratings downgrade and a possible vote of no confidence in President Jacob Zuma is keeping markets uncertain.

By 09:45 on Monday, the rand had dropped by 1.26% to trade at R13.57 against the greenback.

South Africa could be downgraded to junk status as soon as Monday by Standard & Poor’s, who reportedly had an emergency meeting at the weekend, according to Business Day.

Former Finance Minister Pravin Gordhan

While there is uncertainty, Rand Merchant Bank analyst John Cairns believes foreign investors “are not panicking”.

“They bought another R2bn of bonds on Friday, taking the total for the week to R12bn,” he wrote in a note on Monday.

“The tide of cash flooding emerging markets is such that it is lifting even half-submerged boats,” he said. “Foreign flows remain one of the key indicators we are watching to see if the market response can remain sanguine.”

Investor have “oddly” been buying local bonds as a sign of profit-taking and optimism that maybe things won’t be as bad as predicted, TreasuryOne dealer Phillip Pearce explained in a note on Monday.

“International investors are still yield-hungry and are willing to take on additional risk to get it, but their risk appetite will need to be tempered with caution as most of the market fell into the lull of ignoring the political risk that needed to be priced into the rand,” he said.