Rand Heads for Six-Week Low as Gordhan Summons Puts Job at Risk

  • SocGen: 80% chance S&P will downgrade South Africa to junk
  • Nedbank doesn’t see rand ‘blowing out’ to January’s levels

The rand weakened for a second day, heading for the lowest in almost six weeks amid renewed concerns that South African Finance Minister Pravin Gordhan’s job is on the line.

The currency of Africa’s most-industrialized economy declined as much as 0.8 percent to the lowest since Sept. 1 on a closing basis and was 0.7 percent lower at 14.4760 per dollar by 12:31 p.m. in Johannesburg. Benchmark government bonds due December 2026 weakened for a third day, the longest stretch since the three days to June 14. The yield rose three basis points to 8.96 percent, heading for the highest close since Sept. 1.

The rand slumped 3.9 percent on Tuesday after Gordhan was told to appear in court on fraud charges that he says are politically motivated. The prosecution highlights how President Jacob Zuma “is not being properly controlled” within the African National Congress, even after the ruling party’s poor performance in August local-government elections, said Phoenix Kalen, an emerging-market strategist at Societe Generale SA.

“That’s a concern on this kind of persistent threat that Zuma poses for South African assets,” Kalen said by phone from London Wednesday.

The summons could give Zuma a pretext to remove Gordhan amid speculation they have clashed over control of the national treasury, according to Rand Merchant Bank. Gordhan has been among those leading efforts to stave of a credit-rating downgrade to junk by reining in spending by the government and state-owned companies. The minister himself said Tuesday he would continue to do his job, while Zuma said Gordhan had his full support.

“The presence of Gordhan is so crucial” in stabilizing the risk of South African institutions being compromised, according to SocGen’s Kalen, who sees an 80 percent probability that S&P Global Ratings will cut the country’s rating on Dec. 2. “There’s so much more focus on what fiscally can be delivered in this kind of charged political context and so ratings agencies are even more likely to view the political risk as a consideration in their assessment.”

The cost of insuring South Africa’s dollar debt for five years rose to the highest in three months on a closing basis. One-week implied volatility in the rand climbed for a second day to the highest since Sept. 16.

While the political-risk premium investors are attaching to South Africa is pressuring the rand, the currency isn’t likely to weaken to its January levels near 18 to the dollar, according to Nedbank Group Ltd.

“In the absence of any material changes, in the absence of a credit-rating downgrade, in the absence of Pravin being forced to step down or stepping down of his own volition, I wouldn’t necessarily see that rand blowing out to the kind of weaker levels we had earlier in the year,” said Mohammed Nalla, head of strategic research at the Johannesburg-based bank. “The ratings agencies are very pragmatic. Has the probability of a downgrade risen from last week to now? Undoubtedly, yes. Is it enough? I don’t think just yet.”

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