The South African rand rebounded after the ANC proposed forming a national unity government following its loss of a parliamentary majority. The currency rose 0.5%, but hedging costs against its decline increased. Barclays economist Michael Kafe noted potential internal conflicts in the proposed coalition, affecting long-term stability.
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By Colleen Goko
The rand ended a three day losing streak Friday after the African National Congress said it will look to form a government of national unity after losing its parliamentary majority.
The currency gained 0.5% to 18.8883 per dollar as of 9:24 a.m. in Johannesburg. However, the cost of hedging against rand declines over the next year continued to rise, reflecting some continued uncertainty over the outlook.
While the ANC’s proposal would calm nerves in the short term, a unity government raised the risk of internal disagreements and social dissatisfaction down the line, according to Barclays Plc economist Michael Kafe.
President Cyril Ramaphosa on Thursday said the ANC was engaging with several political parties, including the Democratic Alliance and the populist Economic Freedom Fighters. He warned that the ANC would isolate those who sought “to cause chaos and instability and division,” a thinly veiled warning to former President Jacob Zuma’s uMkhonto weSizwe Party, or MKP.
“While markets may not be excited about the inclusion of the left-leaning EFF, we believe that it will take some comfort in the fact that the combination of the ANC and the market-friendly DA accounts for more than 50% of parliament,” said Barclays’ Kafe in a note to clients.
That would allow the ANC and DA to out-vote the EFF “on controversial and potentially unproductive left-leaning policy issues such as land expropriation and nationalisation,” Kafe said.
The ANC failed to secure a parliamentary majority after the May 29 election for the first time in 30 years, receiving only 40.2% of the vote.
The cost of hedging against declines in the South African rand over the next 12 months climbed Friday to its highest level this year. While the currency was gaining, it’s still headed for its third weekly decline against the dollar.
South Africa’s sovereign-risk premium has risen faster than the average of African peers over the past month. The extra yield that investors demand to own the nation’s dollar debt rather than Treasuries stands at 335 basis points, according to JPMorgan Chase & Co. data.
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