South African rand plunges amid fresh political turmoil

The rand had been one of the best-performing emerging market currencies in 2017, but it has plunged in the thick of fresh political turmoil and is now one of the worst performing.

South African rand
Source: Bloomberg

After outperforming most emerging currencies this year, and reaching its best levels since June 2015, the rand made a complete U-turn to become one of the worst performing currencies over the last few days, giving up more than 4% in 24 hours against the euro, the US dollar and the pound.

The catalyst for the sudden weakness was a presidential order sending the finance minister, Pravin Gordhan, home from an investor roadshow with little explanation. There are a couple of potential motives according to the speculation.

Firstly, Sahara Computers, owned by the Gupta family, has filed papers in the North Gauteng High Court disputing that the state attorney can represent the finance minister and seeking that Gordhan covers the costs in his personal capacity.

The Gupta family are business moguls who are closely tied to South Africa’s president, Jacob Zuma. They have been implicated by the public protector to have played a key role in the appointment of certain South African cabinet members to serve their personal business objectives. The top four South African banks closed accounts linked to the Gupta family businesses and in turn the family is legally contesting the finance minister’s involvement therein.

Secondly, president Jacob Zuma may be planning a cabinet reshuffle, with Gordhan and his deputy possibly set to be fired. If this is the motive for the finance minister having been sent home it would suggest further state capture.

The news follows the conclusion on Sunday of a meeting of the National Executive Committee of South Africa’s leading political party, The African National Congress’ (ANC). According to a report on Bloomberg, Zuma told senior leaders of the South African Communist Party that he plans to fire the finance minister.

The situation reminds us of the rand’s vulnerability to political noise, particularly relating to a historic pillar of strength in South Africa: the finance department. The country remains on the precipice of a possible ratings downgrade in June this year, which would move it into a sub-investment grade rating.

At the moment rating agencies such as Standard & Poor’s, Moody’s and Fitch will be looking at the poor shape of state-owned enterprises. The list includes social grants mismanaged by the South African Social Security Agency (SASSA), heavily indebted South African Airlines (SAA), a South African Broadcasting Commission (SABC) with no CEO and dissolved board, and the Passenger Rail Agency of South Africa (PRASA) also without CEO and a dissolved board. With slow economic growth (+0.3%) in 2016 and a dubious situation in many of the country’s state-owned enterprises, increased political uncertainty relating to the treasury is arriving at the worst possible time if South Africa wants to avoid a ‘junk’ rating status.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.

Find articles by analysts