Cabinet reshuffle, downgrade knock rand's emerging markets crown

Apr 06 2017 18:50
Lameez Omarjee

Johannesburg – The rand is no longer the best performing emerging market currency after losing more than 9% of its value against the US dollar, economist Kevin Lings said.

In a review of the currency, he pointed out that the rand was the best performing emerging market currency since the beginning of the year, having gained 10.1% against the dollar.

However, since March 27 when President Jacob Zuma recalled former finance minister Pravin Gordhan from an international investor roadshow, heightening speculation of a Cabinet reshuffle, the rand started losing ground.

READ: Markets turbulent, rand 4.8% weaker than pre-Gordhan recall news

With the Cabinet reshuffle materialising and Gordhan replaced with former home affairs minister Malusi Gigaba, the currency plummeted.

The rand also took a beating following the subsequent credit downgrade by Standard & Poor’s to junk status, and as Moody’s placed the sovereign rating on review for downgrade.

“As a consequence of these and other political developments, since 24 March 2017 the rand is now the worst performing emerging market currency with a loss of -9.7% against the US dollar,” said Lings.

The rand dropped 9.6% against the pound and -7.9% against the euro.

“From my perspective a decline of almost 10% in eight trading days amounts to significant currency weakness,” added Lings.

Emerging market exchange rate vs the dollar over the past 10 days 

However, some of the weakness has been mitigated by the fact that there is a trade surplus, offsetting investment outflows. Additionally, many institutional asset managers already have large offshore exposure and are unlikely to move more funds overseas, explained Lings.

Further, emerging market currencies are currently in favour and investors have accepted the instability associated with the political turmoil in these markets, he said. 

Lings reiterated views that both Moody’s and Fitch would likely downgrade South Africa’s credit rating.

Fitch has South Africa at BBB- and a downgrade would see the rating at sub-investment grade. Moody’s still has South Africa two notches above junk status at Baa2, with a negative outlook.

“The rand will remain weak as these downgrades are announced, but necessarily weaken dramatically further,” said Lings.

ALSO READ: Rand could stabilise if no more nasty surprises

A currency analyst said the rand could start stabilising. Pressure could be easing and the currency may stabilise or even reverse its downward trend, explained Rand Merchant Bank analyst John Cairns.

Earlier in the week, the rand seemed to be firming as calls were made for Zuma to resign. But it tumbled following news on Wednesday that the ANC would not recall Zuma.

The rand was trading at R13.80 to the dollar at 15:28.


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jacob zuma  |  cabinet reshuffle  |  currencies  |  rand  |  markets



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