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The rand after outperforming most emerging currencies this year and reaching its best levels since June 2015, has done 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 Dollar and the British Pound.
A presidential order sending Finance Minister, Pravin Gordhan home from the investor roadshow with little explanation of the reasoning thereof being the catalyst for the currency weakness. Speculation is rife on the motivations for the surprise order from the president, consider some of the below:
- Gupta (implicated in South Africa State Capture report) owned Sahara Computers have filed papers in the North Gauteng High Court, disputing that the state attorney can’t represent Finance Minister Pravin Gordhan and seeking the minister to pay costs in his personal capacity
- There are only a few days left for the South African Social Security Agency (SASSA) to secure an extension deal to pay out pension grants (possible welfare crisis looming)
- President Jacob Zuma may be planning a cabinet reshuffle
The latter is the most concerning possible motive and is the most speculated by markets and the public at present as the news follows the leading political party, The African National Congress’ (ANC), National Executive Committee (NEC) meeting concluded on Sunday. This is furthered by rumoured reports (source: Bloomberg) that the President told senior leaders of the South African Communist Party (SACP) that he plans to fire the Finance Minister.
The move reminds us of the Rand’s vulnerability to political noise particularly relating to a historic pillar of strength in South Africa the Finance department. South Africa remains on the precipice of a possible ratings downgrade in June this year, which would move the country into a sub-investment grade rating should it occur. At the moment ratings agencies (S&P, Moody’s and Fitch’s) will be looking at the poor state of State owned Enterprises (SOEs) which see’s SASSA having mismanaged social grants, the heavily indebted South African Airlines (SAA), a South African Broad Casting Commision (SABC) with no CEO and dissolved board and the Passenger Rail Agency of South Africa (PRASA) also with no CEO and a dissolved board. With economic growth slow (+0.3%) in 2016, and a dubious situation with many of the country’s State Owned Enterprises, increased political uncertainty relating to treaury is arriving at the worst possible time if South Africa wants to avoid a “Junk” rating status.