South African Rand Crushes Pound and Dollar after Cyril Ramaphosa Clinches ANC Party Leadership by 179 Votes

Ramaphosa's election win is a significant event for South Africa and its economy and comes at a pivotal time for both.

The Pound-to-Rand rate slumped for a second day in a row Monday after reformist candidate Cyril Ramaphosa, the financial market favourite, emerged victorious from the fiercely contested ANC party leadership race.

Deputy President of State and now the President of South Africa’s ruling party, the African National Congress, Cyril Ramaphosa saw off rival Nkosazana Dlamini-Zuma by just 179 votes according to a report by News24.

The final count was 2,440 delegates in favour of Ramaphosa as party leader at the ANC conference, to Dlamini-Zuma’s 2,261.

Monday’s winner, Ramaphosa, is widely seen as South Africa’s next President of State. His election is a significant event for South African politics and for the South African economy and it comes at a pivotal time for both.

BREAKING: Ramaphosa wins! #CR17https://t.co/Ll0cHDNIWU pic.twitter.com/1SATJXKngD

— News24 (@News24) December 18, 2017

Sterling slumped more than 3% against the Rand, to be quoted as low as 16.76, while the USD/ZAR rate was quoted some 4% lower at 12.59. This is a more than a six-month low for the USD/ZAR rate. 

Above: Pound-to-Rand rate shown at hourly intervals.

Pound-to-Rand Pummelled After Game-Changing Court Ruling Ahead of ANC Conference

South Africa’s Rand surged Friday after a key court ruling that may now have tipped the balance of the ruling ANC party’s leadership election this weekend, in favour of a reformist candidate who is also the international financial market’s favourite.

A News24 report said the High Court in Bloemfontein has barred a number of Free State branches of the ANC from attending the weekend’s leadership election as delegates. 14 branches and 27 Provincial Executive Committee members will now not be able to vote in the election, according to the report.

This matters given that Free State is one of nine provinces in total and is heavily in favour of the status-quo candidate, Nkosazana Dlamini-Zuma. It is also one out of the three member "Premier League" grouping of loyalist Jacob Zuma-supporting provinces.

Dlamini-Zuma is the former wife of President Jacob Zuma and the least preferred candidate for party leader, and likely future President, in the eyes of creditors and the international financial markets.

Strategists and other pundits said earlier this week the odds of a Dlamini-Zuma victory were finely balanced with the chances of reformist candidate, and market favourite, Cyril Ramaphosa.

“Ahead of the party conference the implied volatilities in USD-ZAR have risen significantly as uncertainty is high. In view of the political conflict the outcome of the ANC party conference is difficult to predict as are the effects on the rand,” says Elisabeth Andreae, a strategist at Commerzbank.

The ANC’s leadership vote itself matters because it could be the difference between South African economic and political governance making a turn for the better, or continuing along its current path. (Readers can gain insight into that here). 

A change of direction and improved economic stewardship is key for South Africa in the eyes of international investors, because without these the country’s local currency credit rating could be cut to “junk” as soon as this month - but likely in February.

This would raise the cost of borrowing and exacerbate the very budget deficit that has brought the country under the boot of the ratings agencies. It could also make it more difficult for South Africa to raise finance in future.

“We remain bullish on ZAR and S. Africa assets as we keep thinking that too much pessimism is priced in,” says David Hauner, a cross asset strategist at Bank of America Merrill Lynch.

The Rand gained over all of the G10 currencies Friday, aided in part by a weaker US Dollar, although it advanced far further than other emerging market currencies.

Above: Pound-to-Rand rate shown at hourly intervals.

The USD/ZAR rate was quoted 2.25% lower at 13.19 around the London close Friday while the Pound-to-Rand rate was down 3.09% at 17.56.

“Talk in the market is how aggressively USD/ZAR will move on the outcome. There are consistent views on the downside, most thinking of a number north of the key technical number at 12.74, with views stretching to around 13.10 or so,” says John Cairns, a currency economist at Rand Merchant Bank.

“There is more divergence on how far the market could move to the topside: we’ve heard numbers from 14.30 to 15.50.”

South Africa’s local currency sovereign debt rating was downgraded by Standard & Poor’s in November, to beneath the investment grade level, leaving the country and its economy at the mercy of Moody’s next rating decision.

Moody’s is the only remaining agency to have an investment grade rating assigned to South Africa’s debt.

“Moody’s imminent rating downgrade is hanging over the country like a Damocles sword. The rating agency had signalled in November that it would await the party conference and the new budget before taking its decision,” says Commerzbank’s Andreae.

In its downgrade note, S&P cited concerns over the combined effect of a rising budget deficit and headwinds facing the economy - which have slowed the pace of GDP growth and hit tax receipts.

Alleged corruption within the government and governance within state owned enterprises, whose debts are guaranteed by the South African state, is also an issue for creditors and ratings agencies.

“A further downgrade would mean that South Africa will be dropped from global bond indices. This could lead to asset sales of index-based funds to the tune of ZAR 100 to 180bn. - with the resulting negative effects on the rand,” Andreae adds.

Delegates to the four day long ANC conference will vote for their chosen leader on Sunday, as things stand, with early indications of the outcome likely available from Sunday evening.

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