The Finance Minister, The Rand and The Ratings Agencies

The rand has done a complete U-turn after outperforming most emerging currencies this year and reaching its best levels since June 2015.

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. 

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material 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 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. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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