Investors have been roiled by South African President Jacob Zuma's threat to fire his finance minister.
The rand fell sank by almost 3 percent and yields on the country's benchmark 10-year bond jumped by as much as 30 basis points on Tuesday after Bloomberg News reported that Zuma had told allies he planned to fire Pravin Gordhan. But, within the course of the morning, investors were starting to pare those losses.
That optimism looks premature. If Zuma fires Gordhan, investors will take it negatively: the finance minister had become the bellwether for South Africa's openness to overseas money. If he gets a stay of execution, investors will still be concerned that internal political conflict could jeopardize their rights in the country.
History provides some guide as to how much worse things could get. Respected finance Minister Nhlanhla Nene was replaced in December 2015 by David Van Rooyen, a little-known member of parliament from Zuma's ruling African National Congress. Then, domestic 10 year yields surged by nearly 200 basis points and Fitch cut the sovereign credit rating one step to BBB-.
With all three credit rating companies having a negative outlook on South Africa's government debt, the risk is they cut by at least one notch. That would move both Fitch's and S&P's ratings into junk territory, and South Africa would be at risk of losing its hard-fought investment grade status.
The Reserve Bank of South Africa is unlikely to rush to raise rates to defend the currency -- unless there is a real risk to financial stability, or there is clear economic damage being caused. The central bank may well want to send a message about the cost of playing with the country's most respected institutions.
Markets hang in the balance. But by recalling Gordhan in the midst of a high profile international roadshow with investors, Zuma has sent an unmistakable and profoundly negative signal about South Africa's attractiveness as a place to invest.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
At BBB, S&P's domestic bond rating is one step higher than its international foreign-currency rating of BBB-. Moody's rates South Africa's 10-year debt at Baa2, so would require a two-step cut to reduce it to junk status.
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