South African Rand: Far Bigger Losses Could Lie Ahead Warn RMB
The South African Rand has was punished on news that Finance Minister Pravin Gordhan had been sacked by Jacob Zuma during a cabinet reshuffle.
Such was the Rand’s depreciation after the event that one Pound could buy 16.99 Rand after the news struck, compared to only 15.44 only four days previously.
Gordhan had brought stability to financial markets after a period of high volatility when one finance minister was replaced by another in quick succession.
After Gordhan’s appointment the Rand rose and markets stabilised due to his reputation as a safe pair of hands and his prior experience as a Finance Minister in 2009-2014.
On several occasions Gordhan has been at risk of losing his position, however, as when he was investigated by the ‘Hawks’ South Africa’s internal security agency – the equivalent of M15 or the FBI – for supposed misuse of his authority when he was head of Revenue and set up a task force to eliminate tax avoidance.
Charges were subsequently dropped, however.
Gordhan’s successor is the former minister of Home Affairs Malusi Gigaba, however, markets have reacted negatively to the appointment given his relative lack of experience and profile.
"The market will struggle to digest Gigaba. We think this is bad for the market and for SA," Nomura emerging markets analyst Peter Attard Montalto said in a note.
This could mean more upside for the Pound versus the Rand.
The latest political machinations have reignited fears the country's credit rating could fall to junk status - at the moment it is teetering just above in investment grade but ratings' agencies have repeatedly warned that further political infighting or turmoil could tip it over the edge.
The country's bond markets reacted turbulently to the news by pricing in a substantial increase in risk reflected in rising yields.
In the UK, equity markets fell as resource stocks and companies with heavy exposure to South Africa slumped.
“Old Mutual led the FTSE 100 fallers, dropping 7% as markets reacted to developments with concern. Investec, another financial stock with deep roots in South Africa, fell over 5%. Mondi and Anglo American were also in the top 5 fallers on the FTSE in early trading as the market felt the Gordhan effect. Miners were generally off colour on softer metal prices. In Germany shares in Steinhoff, the South African retail giant that recently bought Poundland, were off by about 3.5%,” comments ETX Capital’s Senior Market Analyst Neil Wilson.
Bigger Losses Ahead
The Rand has pared some of its earliest losses and is well off its lows against the Dollar, Pound and Euro.
"Rand weakness in this entire episode has been far more constrained than we thought likely. We’ve argued that this might have been because the market did not believe that Gordhan would go. If so, then a bigger reaction is likely this morning: early morning losses have been calibrated on early week losses and nothing more," says John Cairns, an analyst with RMB.
Concerning the outlook, Cairns does however warn of further potential losses.
"Perhaps more importantly, foreign investors have not panicked. But they too might have been too complacent. As such, the risks in our view are still for far bigger losses than suffered so far," says Cairns.
