South African Rand Faces Further Losses as Coalition Fears Grow

Image: GovZA. Photo: GCIS.

The prospect of radical left-wing parties forming a ruling coalition in South Africa has spooked the Rand, and analysts warn of further losses.

"Attention turns to South Africa today. The ruling ANC – which performed poorly in the recent elections – yesterday un-nerved markets by suggesting it would be forming a 'National Unity' government – one that included left-wing parties intent on nationalising large chunks of the South African economy," says Chris Turner, head of FX research at ING.

It was reported the ANC, the largest party in the recent elections, is favouring a government of national unity, whereby all parties join a ruling coalition.

This means the far-left EEF party could hold sway, and demand the confiscation of private property in line with its long-held aims. It also means the ethnically exclusive MK party - which wants to change the constitution - will also be at the table.

The Pound to Rand exchange rate rallied 1.32% in midweek trade to 24.19, the Euro to Rand rose 1.16% to 20.60 and the Dollar to Rand hit 18.89 following a 1.0% gain.

Meanwhile, the leader of the South African Communist Party, a foundational partner of the ANC, told the ANC not to work with the Democratic Alliance (DA). The DA is considered a pro-business party that, if partnered with the ANC, can offer policy continuity.

Investors are waking up to a worrying cocktail of political uncertainty posed by the ANC losing its majority, and unless an ANC-DA coalition is announced, the Rand will likely struggle.

"The ANC's executive committee meets today to decide on how to move ahead. Depending on what mandates are given to the left-wing parties the rand could have another large leg lower," says Turner.