South African Rand's 'Mboweni Bounce' Might be Shortlived

Above: Nhlanhla Nene. Image © Pound Sterling Live

- ZAR rises as markets cheer Ramaphosa's pick of finance minister.

- Tito Mboweni replaces Nene after latter implicated in Gupta scandal.

- Change comes days out from Moody's rating review, latest budget.

The Rand has rebounded on the appointment by President Cyril Ramaphosa of former SARB Governor Tito Mboweni to the post of finance minister following the sudden resignation of his scandal-tainted predecessor. 

Tito Mboweni, the first black governor of the South African Reserve Bank, was appointed after it emerged Nhlanhla Nene had withheld details of a past relationship with the Gupta family, an Indian dynasty at the centre of a "state capture" scandal that helped bring down the Jacob Zuma presidency. 

Mboweni will attend his first cabinet meeting on Wednesday.

He is considered a safe pair of hands and his appointment comes just days ahead of a crucial credit rating review by Moody's and weeks in front of the next South African budget.

"His appointment was somewhat of a surprise given that he had taken himself out of the running when the post was vacant in February, advocating for more of an advisory role. But, his change of heart has proved positive for both the rand and benchmark bonds, which gained ground following the announcement, as his prior experience as labour minister and SARB governor will be favoured by business and unions alike," says Nema Ramkhelawan-Bhana, an analyst with Rand Merchant Bank in Sandton, Johannesburg.

Ramaphosa's decision was welcomed by currency markets.

The USD/ZAR rate was quoted as low as 14.51 shortly after the announcement while the the Pound-to-Rand rate fell to record the week's current low at 19.09.

The Rand fell sharply on the initial reports of Nene's resignation in a carbon-copy replay of the price action that ensued when Nene was removed from the post of finance minister in 2015 by President Jacob Zuma.

Nene admitted in testimony to the state capture commission of inquiry that he had visited the Gupta family's home on a number of occassions while serving as deputy finance minister under former president Jacob Zuma and at least once after having been appointed as finance minister on the first occasion back in 2015, according to South Africa's News 24. 

His resignation comes barely more than six months after his appointment by the then-newly minted President Ramaphosa back in February.

Nene himself replaced the outgoing Malusi Gigaba, who as an ally of Jacob Zuma had also been implicated in the state capture scandal that may have seen the Gupta family acquire far-reaching influence over South African government policy in return for their their financial support to Zuma.

Musical chairs in the finance ministry come with the USD/ZAR rate sitting ontop of an 18.4% gain for the 2018 year-to-date and as the government grapples with the challenge of coaxing an austerity-constrained economy out of recession at a time when ratings agencies are watching the government closely and an election is just around the corner in 2019. 

"Although we think Mboweni is market friendly, this does not change our cautious view on ZAR as South Africa still faces a challenging fiscal outlook. Ramaphosa and his administration are in a tough spot of trying to rein in the budget deficit and stabilize debt in order to appease the market and credit rating agencies but without upsetting consumers ahead of elections," says Sue Trinh, head of Asia FX strategy at RBC Capital Markets.

The strong U.S. Dollar, which has reversed a 4% first-quarter loss to trade with an almost 4% 2018 gain during recent months, has forced the Rand onto its back foot this year.

It has also raised the cost of imported goods like oil and pushed up consumer price gauges in all effected economies, reducing real GDP growth and taunting the SARB to raise its interest rate at a time when the economy is least able to cope with higher borrowing costs. Policymakers are yet to actually raise rates.

South Africa slipped into recession during the second quarter of the year, with the economy contracting -0.7% after posting a -2.6% fall in GDP growth at the start of the year. 

President Cyril Ramaphosa has responded by putting together a stimulus programme that is the probably the best that South Africa's public finances can manage without encouraging a downgrade to the nation's credit rating.

The plan is light on new funding given South African government finances remain under the close scrutiny of Moody's, the last agency to still rate the nation's local currency bonds as investment grade.

However, it does redirect through "re-prioritisation" around ZAR 50 billion (£2.7 billion) of existing funding that will now go toward government programmes that Ramaphosa says are more likely to boost the economy.

Advertisement
Secure this strong GBP/ZAR rate. Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here