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Traders on edge dump rand as SARB becomes target in politics

Jul 05 2017 17:54
Robert Brand, Bloomberg

Cape Town - It’s a sign of how nervous investors are about South Africa. The African National Congress (ANC) proposed on Wednesday that the Reserve Bank should be fully state-owned.

Given most central banks worldwide are owned by their governments, the move is likely to have little or no effect on monetary policy, according to Rashaad Tayob, a money manager at Abax Investments in Cape Town.

But in South Africa, it’s enough to spur a selloff. The rand fell as much as 2%, before paring the drop to 1.5% by 14:59, the worst performance among major emerging-market currencies.

READ: Rand knocked as ANC proposes nationalising Reserve Bank

Against the backdrop of a political debate about the bank’s mandate, traders were rattled.

South Africa’s graft ombudsman last month recommended that the central bank’s mandate should be changed to promoting economic growth to favour the poor, rather than protecting the value of the currency.

READ: S&P warns of more downgrades over proposed changes to SARB mandate

That set in motion a debate that continued to rage at the ANC’s policy conference this week at a time when economic arguments have become a proxy in a leadership battle pitting President Jacob Zuma against his deputy, Cyril Ramaphosa.

Sign of the times

“The net effect is zero, but I think investors are on edge given that the mandate of the bank has been questioned and targeted in a very political way,” said Tayob. “It shows that the balance of policy is shifting away from the traditional framework.”

Zuma supporters are in favour of what they call “radical economic transformation,” including transferring more wealth into the hands of the country’s black majority. Ramaphosa is seen by some investors as more business-friendly.

Bonds decline

Yields on benchmark government bonds due December 2026 climbed four basis points to 8.82%, reversing an earlier drop. The yield is the highest after Turkey’s among emerging-market peers in the Europe, Middle East and Africa region.

Since its establishment in 1921, the Reserve Bank has always had private shareholders who vote to appoint seven of the central bank’s 10 non-executive directors.

The board, which also includes the governor and three deputies as executive directors, is responsible for the governance of the central bank, while the Monetary Policy Committee directs policy. Private shareholders have no say on policy or the appointment of the governor.

READ: SA economy suffers severe beating amid political woes

The proposal was approved in a plenary session at the party’s policy conference in Johannesburg, said three people, who asked not to be identified because it hasn’t been made public. Decisions taken at the policy conference, which ends on Wednesday, need to be ratified at the party’s national electoral conference in December.

The currency’s three-month implied volatility jumped 50 basis points to 16.28%, the highest among emerging-market peers. That suggests options traders expect wider price swings in coming months.

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