Nene Ousting Risks Accelerating South African Rate Increases

  • SARB could move 50 or 100 basis points in January, Nomura says
  • Monetary policy tightening might have to shore up the rand

The slump in the rand triggered by the shock firing of South Africa’s finance minister may increase pressure on Governor Lesetja Kganyago to raise interest rates more aggressively.

Before the announcement by President Jacob Zuma late on Wednesday that the unknown lawmaker David van Rooyen would replace Nhlanhla Nene after 19 months as finance minister, forward-rate agreements predicted a 72 percent chance of a 25 basis point increase in borrowing costs at the Monetary Policy Committee’s first meeting of 2016 on Jan. 28. By Thursday afternoon, the contracts were pricing in a 50 basis point adjustment.

While the MPC moved rates up in increments of 25 basis points since last July, analysts including Nomura International Plc’s Peter Attard Montalto say a 50 basis point or even a 100 basis point hike is possible in January depending on the rand’s moves and the outflow of capital. The currency of Africa’s second-largest economy plummeted by as much as 5.4 percent to an all-time low of 15.3857 per dollar after Zuma’s announcement, adding to pressure on inflation and raising fears that the nation’s credit ratings could be downgraded to junk soon.

“If South Africa heads further toward a sub-investment grade sovereign rating with the wrong fiscal and structural policies, it may well fall to the SARB to tighten monetary policy, perhaps significantly, to shore up the rand and head off inflation and balance of payments pressures,” Arnab Das, head of EM Macro at Invesco in London, said via e-mail on Wednesday.

Inflation accelerated to 4.8 percent in November and the Reserve Bank has forecast price growth will exceed the upper end of its 3 percent to 6 percent target range in the first and fourth quarters of next year. The five-year breakeven rate, a measure of bond investors’ inflation expectations in the period, rose a record 86 basis points on Thursday to 7.37 percent, the highest since at least May 2012.

“We can no longer view the SARB as sacrosanct either but one should not underestimate the tenacity and drive of Lesetja to protect the independence of the institution,” Nomura’s Attard Montalto said in an e-mailed note on Thursday. “They would have a serious fight on their hands. We must watch for mandate changes.”

The rand was 2.3 percent weaker at 15.3307 per dollar as of 3:26 p.m. in Johannesburg on Thursday. Yields on rand-denominated debt due December 2026 jumped 137 basis points to 10.20 percent. That’s the first time since the height of the financial crisis it’s been above 10 percent.

“The reaction of the market to these events definitely increases the chance of a rate hike,” Dave Mohr, chief investment strategist at Cape Town-based Old Mutual Wealth, a unit of Old Mutual Plc, said by phone from Cape Town.

Raising Rates

The MPC has raised the benchmark rate twice this year to 6.25 percent, even as it cut its growth forecast for the year to 1.4 percent, the slowest pace since 2009. The economy narrowly avoided a second recession in six years in the third quarter. A quarter-point increase in the repurchase rate is projected to reduce the annual GDP growth rate by 0.1 percentage point, Brian Kahn, a member of the MPC and adviser to Kganyago, said on Nov. 19.

The cost of insuring South Africa’s dollar debt against default for five years climbed 39 basis points on Thursday, taking its increase since Nov. 19, when the MPC raised borrowing costs by a quarter percentage point, to 78 basis points. That compares with a 39 basis point increase over the period for emerging-market peer Turkey.

“Mr Kganyago needs yesterday’s shock dismissal of Mr Nene like he needs a hole in the head,” Nicholas Spiro, managing director at Spiro Sovereign Strategy in London, said by e-mail. “The last thing South Africa’s ailing economy needs right now is an aggressive tightening in monetary policy -- yet this is precisely what could happen.”

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