Doing the Math on Rand Adds Politics as Reason to Be Pessimistic

S. Africa Opposition Party Seeks to Impeach Zuma Over Al-Bashir

Jacob Zuma.

Photographer: Jason Alden/Bloomberg
  • Gordhan's re-appointment as finance minister bolsters currency
  • Yet the move barely dents bearishness seen in options prices

Three finance ministers in five days: those two numbers just aren’t adding up for traders of South Africa’s rand.

QuickTake South Africa

Firing one long-term incumbent and then replacing his successor on the insistence of business leaders has so dented President Jacob Zuma’s economic credibility that politics will now be a long-term drag on the currency, according to strategists at Rand Merchant Bank, Brown Brothers Harriman & Co. and Rabobank Group.

The re-appointment on Sunday of Pravin Gordhan, who held the post from 2009 to 2014, allowed the rand to rebound from a record low. While it has almost retraced its losses since the political crisis began almost a week ago, it’s also overtaken the Brazilian real as the major currency that options traders are most bearish about.

“We had an overextended slide in the rand and the currency bounced back slightly, but the negative fundamentals are still weighing on the rand and nobody really expects it to bounce back more,” said Win Thin, head of emerging-market strategy at New York-based Brown Brothers Harriman & Co. “In this environment of high volatility and continuous risks, the rand will likely continue to weaken.”

Thin trading sees the rand ending the year at 15.5 to 16 per dollar, and sliding to 16 to 16.5 -- a new all-time low -- in the first half of 2016. That compares with Dec. 11’s record low of 16.0543 and follows a jump of as much as 6.4 percent on Monday, the biggest increase since October 2008. The currency climbed further on Tuesday, advancing more than 1 percent to 14.9349 per dollar as of 12:10 p.m. in New York.

Zuma, whose African National Congress party has governed South Africa since Apartheid ended in 1994, touched off an extraordinary few days for the country’s markets when he fired Nhlanhla Nene as finance minister late on Dec. 9, replacing him with David van Rooyen, a lawmaker little known to the public or foreign investors.

Even with the appointment of Gordhan there’s speculation the damage has been done. In a continent marred by corruption and political cronyism, South Africa was known for choosing its finance ministers on merit -- a reputation that may now be ruined.

The rand has already tumbled 23 percent in 2015 amid a rout in the commodities the nation relies on for foreign earnings and the prospect of a U.S. interest-rate increase at this week’s Federal Reserve meeting.

Traders are paying more to protect against a weaker rand than they are for any other major currency tracked by Bloomberg. The extra cost for options to sell the rand versus the dollar over contracts to buy surged 2.2 percentage points from Dec. 9-11 to 4.9, before retracing to 3.8, three-month risk-reversal prices show.

‘In Tatters’

“The already fragile market confidence was left in tatters” by the political crisis, said Piotr Matys, a London-based emerging-markets strategist at Rabobank. “It will take time to restore it. It’s too early to be bullish on the rand.”

The median estimate in a Bloomberg survey of more than 30 strategists has the currency at 14.5 to the greenback by the end of 2016, though that reflects optimism before the latest crisis that the rand was bottoming out.

That optimism is evaporating now, and the few strategists confident enough to commit to fresh predictions since Nene’s ouster are cutting their predictions.

Rabobank lowered its March forecast to predict a gain to 14.5 by March, down from its previous estimate of 13.9. The risk is “firmly skewed toward a weaker rand,” Matys said.

Rand Merchant Bank, a unit of Africa’s second-biggest lender, reduced its first-quarter and end-of-2016 forecasts to 15 and 14.5 per dollar, with Johannesburg-based analyst John Cairns saying the rand’s rebound would be “short-term” and that there was volatility ahead.

ANC Politics

Others remain bullish, at least for now. The fact Zuma capitulated to business leaders and colleagues in his own party will go some way toward assuaging investors’ concerns, according to David Cowan, an economist at Citigroup Inc., the world’s biggest currency trader.

“It shows that Zuma’s position is not quite so powerful and that there are still voices of reason within the ANC,” Cowan said from London. “People are positive about that. You know that the fiscal side will be under pressure, but you feel you have a more cautious, hawkish person guarding it. It’s positive in the long run.”

Gordhan moved quickly to reassure markets after his appointment late Sunday. He vowed to defend South Africa’s investment-grade credit rating after Fitch Ratings and Standard & Poor’s pushed it closer to junk status on Dec. 4, and said spending ceilings announced in the February budget were “sacrosanct.”

Yet the rand has already suffered four straight years of losses and a further decline would be a challenge for South Africa. It may stoke inflation which, at just under 5 percent, is hurting growth. The economy is forecast by the central bank to expand 1.4 percent this year, the slowest pace since 2009, while its current-account deficit further weighs on the currency.

Nene’s firing “just highlighted how reckless Zuma is with the country’s finances,” said Craig Thompson of Nyon, Switzerland-based brokerage Continental Capital Partners SA. “Until there’s a credible plan to turn around the deficit and get the economy on a growth track, the rand will be on the back foot.”

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