Cape Town – The rand headed for its biggest weekly slide since 2015, after the firing of Finance Minister Pravin Gordhan raised concerns about the country’s fiscal path and its investment-grade credit rating.
President Jacob Zuma is replacing Gordhan with Home Affairs Minister Malusi Gigaba, the Presidency said in a statement on Friday. African National Congress MP Sfiso Buthelezi will replace Gordhan’s deputy, Mcebisi Jonas.
The rand was one of the top three emerging-market currencies last year and early 2017, but politics are again casting a cloud over the nation’s assets. Gordhan had fended off a downgrade in South Africa’s rating to junk, and his commitment to curb spending and government debt had endeared him to investors. He clashed with Zuma over the affordability of building nuclear power plants and the management of state-owned companies.
“Market reaction to the cabinet reshuffle and what looks to have been a clean sweep of the Treasury top team is going to be a significant negative,” Razia Khan, chief Africa economist at Standard Chartered, said in an email. “Given past volatility in the rand when a cabinet reshuffle was even suggested, the expectation is that the impact may be more pronounced now.”
The rand was down 1.4% at R13.47 per dollar as of 06:10 trading, leaving it heading for an 8% loss for the week – the worst such performance since the last time Zuma rocked markets with a finance-minister firing. Back in December 2015, it was Nhlanhla Nene’s ouster that hurt confidence – an episode that ended with Zuma bringing back the respected Gordhan to office.
GRAPH: The rand/dollar intraday currency trade
Politics aside, the generally positive environment for emerging markets, and synchronous pick-up in global economic growth, argues in favour of South Africa, with its mining assets. Its currency enjoyed a 12.6% jump against the dollar last year – behind only Brazil’s real and Russia’s ruble among emerging markets, according to data compiled by Bloomberg.
“The annoying, frustrating thing from the South Africa perspective is that you don’t want political worries now, because things are trending up, things are picking up,” Moz Afzal, global chief investment officer of EFG Asset Management, said in an interview in Singapore. “South Africa is pretty much in the penalty box” for investors now, he said.
As concerns over Gordhan’s position mounted this week, South Africa’s dollar bonds remained within recent trading rages, and its stock market was still heading for a weekly advance before confirmation of the firing. The FTSE/JSE Africa All Share Index was up 0.9% through Thursday.
“Despite the fraught political situation in which South Africa currently finds itself, we note that dynamics past the immediate horizon favour out-performance in the country’s assets,” Phoenix Kalen, London-based director of emerging markets strategy at Societe Generale SA, wrote in report dated March 31. The bank’s analysts say that making short bets on the rand is expensive and seldom works. Kalen advised waiting “for the dust to settle before entering long positions.”