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.

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. 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. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.

Find articles by analysts

Find out more about