Rand was widely tipped to be 2016’s “comeback kid” – then along came Zuma

Until about a year ago, South Africa somehow avoided the consequences of appointing a man with antiquated economic thinking as its leader. But since President Jacob Zuma determined to assert his wacky beliefs on 50 million countrymen, there can be no doubting the cost of entrusting an economic ship to a delusional captain. In the last 12 months the country’s “share price”, the South African Rand, has lost a third of its value. The consequences of such massive depreciation can hardly be overstated in a country whose rate of development depends on how much capital and equipment it is able to attract. In short, a lower rand means having they become more expensive – in SA’s case, a lot more. Overlay destructive political policies which in the past decade has wiped out much of the country’s food producing capacity and when mother nature deals you a bad hand, the cost of such economic idiocy can easily become revolutionary. South African taxpayers fret about having to fund Zuma’s Nkandla homestead and plundering of the public purse by his cronies. Rational observers know the true cost of an incompetent leader in a modern economy, particularly one determined to apply his ill-conceived ideas, makes that wastage mere chump change. – Alec Hogg

By Xola Potelwa

(Bloomberg) — South Africa’s rand was being tipped by some strategists as one of 2016’s likely currency winners as recently as Wednesday.

They didn’t see Jacob Zuma coming.

The rand fell to an all-time low on Thursday after the South African president unexpectedly fired his widely respected finance minister, Nhlanhla Nene. Barclays Plc, the world’s third-biggest foreign-exchange trader, immediately cut its 2016 forecast for the currency, citing concern the National Treasury won’t stick to spending ceilings and fiscal targets before municipal elections next year. Options markets showed traders added to bets that the rand will weaken in the next three months.


The removal of Nene after 19 months in the job came less than a week after credit-rating companies pushed the nation closer to junk status. Some analysts predicted a recovery for the rand once currency markets stabilize in the wake of the Federal Reserve’s first interest-rate increase in almost a decade.

The median forecast in a Bloomberg survey compiled before Nene’s removal showed the currency gaining 1.4 percent over the next quarter. Those hopes are gone, said Piotr Matys, an emerging-markets currency strategist at Rabobank Group in London.

‘Shocking Decision’

“Previously, we anticipated that there will be some respite for the severely battered rand once the Fed raises rates on Dec. 16 and signals that the path of monetary policy tightening will be fairly shallow,” Matys said in an e-mailed response to questions. “However, the shocking decision to remove Nene from his post left the rand more vulnerable.”

Any slippage in South Africa’s budget targets would provoke further downgrades, raise borrowing costs and hasten capital flight, Miyelani Maluleke, a Johannesburg-based analyst at Barclays, said in a note on Thursday. The currency, which plunged to a record low of 15.4841 per dollar on Thursday, may fall to 17 in 2016 as outflows from bond and stock markets mount, he wrote, revising the forecast from 15.25.

Read also: Daniel Silke: Nene’s financial void. Mr Market disapproves, Rand plummets.

“We see the risk of consistent portfolio outflows as well as an increased risk of more rating downgrades,” Maluleke said. “We would expect the rand to take the brunt of the selling pressure in the short-term.”

The rand overtook Brazil’s real on Thursday as the most bearish major currency, with the premium on options to sell the currency against the dollar over the next three months over those to buy it rising to 3.8 percentage points, a two-month high that compares with 3.18 percentage points for the real. The currency gained 0.5 percent to 15.3953 per dollar as of 6:35 a.m. in Johannesburg.

Yields on benchmark government bonds due Dec. 2026 soared the most on record, climbing as much as 137 basis points to 10.2 percent, before paring the rise to 9.89 percent, the highest on a closing basis since July 2008. Rates on $2 billion of Eurobonds maturing in September 2025 climbed 49 basis points, the most on record, to 5.68 percent, the highest since September 2013.

The rand has depreciated 25 percent this year before an expected increase in U.S. interest rates and as a slump in commodities and a slowdown in China curb exports. The nation’s current-account deficit widened to 4.1 percent of gross domestic product in the third quarter, from 3.1 percent the previous three months, adding to pressure on the rand, while the economy expanded at the slowest pace since the 2009 recession.

‘Bad Timing’

On Dec. 4, Fitch Ratings Ltd. cut the country’s debt to BBB-, the lowest investment-grade level, while Standard and Poor’s lowered the outlook on its equivalent rating to negative. Fitch said looser fiscal policy, such as upward revisions to expenditure ceilings, may lead to more negative actions.

“Zuma gets a gold medal for bad timing,” Peter Kinsella, the London-based head of emerging-market economic and currency research at Commerzbank AG, who recommends long-dollar positions versus the rand, said in a note. “We can expect concerns of further ratings downgrades and the loss of investment-grade status in the short-term. This doesn’t help the Reserve Bank’s task of stabilizing the rand.”

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