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Gordhan axing: Why the rand is remarkably calm

Mar 31 2017 13:22
Carin Smith

Cape Town - Although negative, the rand’s reaction to President Jacob Zuma's Cabinet reshuffle late on Thursday evening has not been as aggressive as one would have imagined, Tumisho Grater, economic strategist at Novare Actuaries & Consultants, said on Friday.  

The restructuring saw the removal of both Finance Minister Pravin Gordhan as well as his deputy minister Mcebisi Jonas. The current Minister of Home Affairs, Malusi Gigaba, will now lead the Finance Ministry, joined by Sfiso Buthelezi as the new deputy.
 
After dipping below R13.00 against the dollar in Thursday’s trade, once the news of Gordhan's axing was known, the rand hit R13.45 to reach a high of R13.62 on Friday morning.

Later the rand was trading below R13.50 against the greenback while the bond market has seen the 10-year bond yield peak at 9% Thursday - up from 8.3% a week ago. Local markets opened weaker, weighed down by financials that were down by over 3% in the first hour of trading.

By early afternoon on Friday the rand was down 4.07% to R13.38.

“I think the market is cautiously optimistic that the private sector and other members of the Cabinet will react,” said Purple Group markets analyst Nilan Morar.

READ: Rand hits R13.60/$ as it continues freefall on Gordhan axing

According to Grater, it’s important to highlight that the rand has also found support in the improved global economic backdrop, favourable terms of trade, a narrowing in the current account deficit and attractive carry trade.

"In terms of a less aggressive move, we may be witnessing the scale tilting towards the supportive global factors as opposed to the negative local political developments.

"Some also foresee that a dramatic turn of events could still occur that would result in the outcome being reversed or some stability being restored from other forces within the ruling party or opposition. Subsequently, the weekend and the events that may follow will be closely watched," said Grater.

READ: Rand rout: Seven risks to watch

The 5-year SA credit default swaps (CDS) spreads have ticked up from 193.5 basis points to the current level of 223 basis points - reflecting an increase in SA’s perceived credit risk by investors, in her view.

"The degree of unpredictability and instability presented by the recent political events have not only caused the rand to weaken, but also further eroded the much-needed confidence that is required for capital investment which would be supportive of economic growth and job creation," said Grater.
 
"From a credit rating’s perspective, the removal of a finance minister in this manner may be viewed as deterioration in South African structures and, therefore, it may have a negative consequence. Although political developments are not the only factor that credit rating agencies take into account, this could have an impact on other pillars that are taken into consideration, such as institutional strength and economic growth," said Grater.

"Another factor that credit rating agencies will consider is the commitment to the reform agenda. Should momentum be slowed or lost in the perceived Finance Ministry-driven reform initiatives, such as on procurements and SOE governance reforms, some of the contingent liabilities may affect the balance sheet of the sovereign, which is again a big negative."

pravin gordhan  |  sa economy  |  markets  |  currencies  |  rand
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