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Rand unusually strong despite Gordhan shock - economist

Johannesburg – Nomura maintained its year-end outlook of the rand to be as high as  R17/US$, according to emerging markets economist, Peter Attard Montalto.

The rand traded 4% weaker at R14.3524/$ by 18:00.

In a statement Montalto explained that despite the shock news that Finance Minister Pravin Gordhan has been summoned to appear in court to answer to fraud charges, the rand is unusually strong, given the SABMiller and AB InBev trade inflows.

He added that the mini budget to be announced on 26 October 2016 is unlikely to be “derailed” by the news. He explained that the fiscal outlook will “look fine” as the budget process has already been set.

Ratings agencies are not expected to react on the news either. “We still see S&P and Fitch more likely than not to downgrade on 2 December on lower growth and lack of structural reforms alone,” he said.

READ: Dawie Roodt on why the rand won't tank to R20/$

Previously in a credit opinion released by Moody’s, the ratings agency indicated that a downgrade would result if South Africa fails to ensure growth recovery, and if structural reforms are not in place to contribute towards sustainable growth and stabilise debt.

Fin24 reported that the ratings agency believes the country’s institutions remain strong. This includes the independent judiciary, the Reserve Bank, the auditor general and National Treasury. Moody’s added that it was focusing on policy certainty.

READ: Despite political noise, SA institutions remain strong - Moody's

“We see the political and policy uncertainty continuing through to end-2017,” said Montalto. Growth, job creation, domestic private sector investment are expected to be held back. The removal of President Jacob Zuma is also highly unlikely.

Montalto said that if the hawks probe in Gordhan escalated into a cabinet reshuffle, and the “degradation” of Treasury as an institution, it would have “much larger and longer-lasting” negative impacts on the economy.

Chief economist at Investment Solutions, Lesiba Mothata explained in a statement that “self-inflicted” crises have a lasting effect and could prove to be more damaging than negative impacts from elsewhere in the world.

Despite economic tailwinds South Africa is not immune to a shift in investor sentiment, stated Mothata.

South Africa should be on a growth path to achieve GDP growth of more than 1%. “However, the ongoing machinations surrounding the leadership of the National Treasury induces huge uncertainty regarding the path fiscal policy will take from here,” he stated.

“It is unfortunate that when South Africa can easily delay a ratings downgrade, it seems poised to deliver its fate to a sub-investment grade (so-called junk status) decision,” he added.

Montalto said that these recent developments will continue to erode investor confidence. 

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