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Political turmoil roils rand and rate bets

Mar 17 2016 10:14
Bloomberg and Fin24

Johannesburg - Political turmoil is worsening in South Africa, undermining investor confidence in the country and hitting everything from the rand to interest-rate bets.

The currency and bond yields have fluctuated sharply this week as Finance Minister Pravin Gordhan called the police’s questioning of him “harassment” and revelations emerged of cronyism in President Jacob Zuma’s administration.

READ: Gordhan condemns 'harassment' by Hawks

After gradually gaining ground in March, the rand weakened 2.6% against the dollar on March 15 after the Hawks said they will force Gordhan to cooperate with their investigation of the tax agency, which he had led before 2009. A day later, the rand reversed losses after Deputy Finance Minister Mcebisi Jonas said he was offered the finance minister’s post by Zuma’s friends the Guptas, allegations that may undermine the president’s power.

Analysts divided on rates decision

With the economy threatened with recession and inflation above the 3% to 6% target, economists and traders are divided on Thursday’s interest rate move.

Standard Chartered on Wednesday changed its forecast for Thursday’s interest-rate decision to a 50 basis-point increase, from an earlier prediction of no change. Recent developments have been a key factor in the revised view, Razia Khan, head of the bank’s Africa economic research, said in an emailed note to clients.

Of the 30 analysts surveyed by Bloomberg, 16 predict the monetary policy committee (MPC) will keep the benchmark rate unchanged at 6.75%, while the rest expect a 25 basis-point increase.

READ: Too-close-to-call rate move puts Kganyago on spot

At the end of last week, traders were pricing in a 55% chance the Reserve Bank will increase the repurchase rate by 25 basis points to 7%. That probability increased to 79% on Wednesday, according to forward-rate agreements starting in one month, used to speculate on borrowing costs.

The rand fell 0.4% to R15.7282 against the dollar as of 08:40 in Johannesburg on Thursday, and was trading at R15.74 at 09:36. Yields on the rand bonds due 2026 gained 5 basis points to 9.47%.

Reserve Bank governor Lesetja Kganyago is contending with inflation above the 3% to 6% target band and an economy that’s set to grow less than 1% this year. The MPC raised the benchmark interest rate by half a percentage point in January.

The rand, which has dropped 3.2% against the dollar in the past three months, is still recovering from the market fallout in December when Zuma unexpectedly fired Nhlanhla Nene as finance minister in favour of a little-known lawmaker Des van Rooyen. The president backtracked four days later and reappointed Gordhan to a post he had held from 2009 until 2014.

Moody’s Investors Service, which cited the Treasury’s inability to manage the country’s debt and cautioned against the risk of further shocks to economic growth, is currently in the country to review South Africa’s credit rating this week for a possible downgrade to one level above junk.

The agency announced last week that it had placed SA’s credit rating on negative watch, suggesting the next move could be a further downgrade. A downgrade would bring SA’s rating in line with Standard & Poor’s, which is one notch above junk status.

READ: Moody's assessing SA amid rating jitters

A weakening in South Africa’s institutions may put the rating at risk, “with potentially negative implications for the rand”, Khan said. “The Reserve Bank is likely to be sensitive to this risk, especially given the vulnerability of the inflation outlook to further rand weakness.”

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