Rand still roiling from Gordhan bombshell

Cape Town – The rand’s sudden drop in value following the National Prosecuting Authority’s (NPA) decision to summon Finance Minister Pravin Gordhan is not the end of the rand’s decline, according to an economist.

The rand, which hit R14.42/$ after the NPA said Gordhan would face charges of fraud over the early retirement of former deputy Sars commissioner Ivan Pillay, had not recovered since the news on Tuesday.

After recovering to R14.36/$ overnight, it declined back to R14.45/$ in early morning trade on Wednesday and by 10:45 it stood at R14.42/$.

Rand Merchant Bank analyst John Cairns said their experts believe there is no legal reason why Gordhan will have to leave his post, even after the charges are formally instituted against him in court on 2 November.

“The chance that the minister and his co-accused are found guilty remains very low,” he said on Wednesday. “The charges appear extremely flimsy and even the charge sheet was, reportedly, hastily and badly drawn up.

READ: Picture proof that NPA charges against Gordhan trumped-up

“His innocence, however, may take years to be proven. It is next to impossible for the court to throw out the case on 2 November and the actual real court hearings will only begin a year later at the very soonest.”

His position as finance minister will therefore be a political decision, he said. President Jacob Zuma on Tuesday threw his support behind Gordhan, saying:  “Gordhan is innocent until and unless proven otherwise by a court of law”.

Umkhulu Consulting analyst Adam Phillip said local bonds were down about 1.5%, but said the really important instrument was the credit default swap, which rose to 266 basis points.

“This is now higher than Turkey's CDS and they were downgraded recently,” he said.

Phillips expected a bigger fall in the rand, while Cairns said the market’s reaction seemed justified. “After all what has really changed from what we knew before,” Cairns queried.

“At first glance, the rand’s reaction to the news yesterday was very constrained,” said Cairns. “Considering that USD/ZAR spiked R1.60 immediately on Nenegate and eventually peaked around R2.60 higher.”

Nomura emerging market economist Peter Montalto repeated the bank’s position that the rand will reach R17/$ by the end of 2016.

READ: Rand unusually strong despite Gordhan shock - economist

“Markets continue to grossly underestimate political risk and its macro implications in South Africa in our view,” he said on Tuesday. “As such we have kept our R17/$ year-end view.”

He said Gordhan’s summons “is only a small cog in a much larger and existential succession battle within the ANC that will continue until the end of 2017 – damping investor confidence and growth”.

“We have continually claimed the market is grossly underestimating political risk premia,” he said.

He said the rand needs more political risk premia, and compared to events earlier in the year finds itself unusually strong on the back of SABMiller/AB InBev inflows.

He said the rand “will always try to grind stronger, but then be batted weaker by news shocks like this”.

“This makes it an exceptionally difficult market to trade, but we stick still with our year-end view of R17/$.”