Rand Slumps as Finance Minister's Dispute With Police Worsens

  • Gordhan missed deadline to answer questions, Hawks Say
  • Feud raises concern about stability at National Treasury

The rand slumped to a two-week low against the dollar and government bonds dropped by the most this year after a special unit of the police said it would exercise its “constitutional powers” to ensure Finance Minister Pravin Gordhan answers questions in an investigation.

The South African currency tumbled as much as 3.4 percent to breach the 16 level for the first time since Feb. 29 and was the worst performer among 31 emerging-market and major currencies trading against the dollar. It traded 2.5 percent weaker at 15.9121 per dollar by 6:05 p.m. in Johannesburg.

Gordhan’s dispute with the police special unit, known as the Hawks, comes at a time of heightened vulnerability for the South African economy, with the government attempting to ward off a credit rating downgrade to junk. Tuesday’s sharp slump in the rand increases the pressures of imported inflation and may force the hand of central bank policymakers who meet Thursday to decide whether to increase interest rates as annual growth falters to less than 1 percent.

“If it results in the removal of the finance minister it speaks to even further institutional erosion in South Africa,” Mohammed Nalla, head of strategic research at Nedbank Group Ltd., said by phone from Johannesburg. “That’s what international investors are absolutely terrified about.”

Yields on the benchmark rand-denominated government bond jumped 32 basis points, the most since Dec. 11, to 9.46 percent, while rates on the nation’s dollar-denominated debt due September 2025 rose 12 basis points to 5.29 percent.

The Hawks said Tuesday Gordhan missed two deadlines to respond to questions about an investigative tax unit, called the National Research Group, set up when he ran the tax authority and which local newspapers said probed politicians, including President Jacob Zuma. On Monday, Gordhan said he hadn’t been notified of the second deadline and accused the Hawks of harassing him.

‘Without Prejudice’

The rand could weaken to 18.50 to the dollar, or even 20, should reassurances on fiscal management communicated by Gordhan through the Feb. 24 budget or in his meeting last week with investors in the U.K. and the U.S. be compromised by political turmoil, Nalla said. The currency’s three-month implied volatility against the dollar jumped by the most in two months, rising 1.3 percentage point to 20.1545 percent, as options traders anticipate wider price swings in coming months.

“We are mandated to investigate without fear, favor or prejudice,” the police’s Hawks unit said in an e-mailed statement. “Our legal team are forging a way forward, which will see the Hawks exercising our constitutional powers.” The Treasury said later that Gordhan had instructed lawyers to prepare responses to the Hawks’ questions.

Forward-rate agreements starting next month, used to speculate on interest rate moves, rose 6 basis points to 7.24 percent to price in a 83 percent probability that the central bank may raise interest rates by 25 basis points on Thursday. Aiding the rand’s decline was a second daily drop in emerging market currencies as commodity prices weakened and growing wagers the Federal Reserve will raise interest rates as soon as next quarter damped demand for risk.

Investor sentiment toward South Africa has yet to recover from events in December, when Zuma roiled markets by firing his finance minister and replacing him with a little-known lawmaker, causing the rand and bonds to plunge. Zuma backtracked on his decision four days later and appointed Gordhan to the position he had held from 2009 to 2014.

Drought, Unemployment

Africa’s most industrialized economy is under strain, even without shocks from political turmoil. The World Bank has cut its growth forecast for the year to 0.8 percent from 1.4 percent as the country contends with the worst drought in more than a century. In a year of local government elections, the ruling African National Congress is confronted by an unemployment rate of 24.5 percent, the highest among 60 countries tracked by Bloomberg.

“The rand is the weakest link so far this week due to growing tension between Finance Minister Pravin Gordhan and his political opponents,” Piotr Matys, an emerging-market currency strategist at Rabobank, said in a note. “It seems that the political atmosphere is increasingly toxic at a time when Gordhan is making attempts to restore confidence amongst foreign investors after it was completely shattered by the finance ministry debacle in December.”

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