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Rand breaches R14.50/$ amid move on Treasury for Zuma's free fees plan

Nov 13 2017 10:43

UPDATE:

Cape Town - The rand has breached R14.50/$ on Monday as news filtered through of President Jacob Zuma's seemingly imminent plan to push through free higher education.

The rand, which opened at R14.40 to the US dollar on Monday after hitting R14.43/$ in early Asian trade, spiked to R14.50 against the greenback by 10:45 amid reports of the Presidency's interference at National Treasury to push through Zuma's fee plan.

By 11:15 the local unit has spiked to R14.51 to the US currency, a 16-month low after reports that Michael Sachs, a deputy director general who headed up the budget office, quit last week.

Fin24 has obtained independent confirmation from two sources close to Treasury that the  Treasury veteran of ten years resigned as the issue of free higher education was steamrolled by Zuma.

“Michael didn’t necessarily oppose the idea of free education, but he wouldn’t stand for the interference in the budget process,” a source said.

Zuma’s plan to find R40bn within the constrained budget to fund a free-education policy for families who earn less than R350 000 comes amid changes to the budget process, where National Treasury’s role in keeping a lid on government spending and finding the best ways to grow the economy has taken a back seat to the Presidential Fiscal Committee (PFC).

Sachs and other senior officials were apparently unable to go along with the new budget process to cut R40bn from the current medium-term budget policy statement to fund the proposal, Business Day reported on Monday.

RMB currency strategist John Cairns said the threat that free higher education will be announced soon will continue to weigh on the market "today (and multi-week), but we could see some pullback" as data and events risks are moderate.

"Fears that President Zuma is set to announce free higher education will continue to weigh, particularly as almost every broadsheet in the country read the story on the front page over the weekend.

"The President’s statement on the issue has only clarified that he did not want — as alleged in the Sunday media — to make the announcement during his State of the Nation Address, and adds nothing on his current thinking or planned actions," Cairns told investors on Monday.

He said if the President does plan to announce free higher education, then it would make sense to do this after the 24 November rating reviews but before the ANC National Conference, "implying late November or early December is a major period of risk".

"All South African markets are feeling the pressure. The sovereign CDS, in particular, has come under pressure and is now trading at levels that fully price another rating downgrade.

"Global issues are of secondary importance in driving the rand currently," he said.

Andre Botha, dealer at TreasuryOne, said the rand's choppy trade is due to the local rumour mill spinning at full tilt on Zuma's move for free higher education becoming imminent and continued speculation that Deputy President Cyril Ramaphosa could be facing the axe.

Botha said the reality is that there are no funds available to justify the free education notion.

"This will place enormous pressure on an already overstretched economy," he said.

The rand already came under pressure on Friday amid the free fee talks and growing speculation that both Moody’s and S&P will downgrade South Africa’s local currency credit ratings to junk status by end-November. This could trigger large outflows from South Africa’s bond market, NKC Africa Economics said on Monday. NKC expects the local unit to trade as high as R14.50/$ on Monday.

Botha said at the moment the tremendous yield-seeking behaviour that was the status quo for the most of the year has subsided. "With the removal of the 'yield-shield' we have come to see the bare bones of the South African economy and the sight is not one to behold.

"This leaves the rand open for further attacks should the end of the year (rating agencies and ANC conference) events not play out according to plan."

Host of factors

Tumisho Grater, economic strategist of Novare Actuaries and Consultants, said the rand’s slide continued on Monday morning trade as a host of factors weighed on the local unit.

"Last week’s news that the US tax proposal may be delayed resulted in a global risk-off mood which negatively impacted the rand. Since then, the local unit has been feeling the weight of policy and political developments," she said.

"Growing speculation that President Jacob Zuma will soon announce free higher education also left markets anxious as the move would put added strain on the country's already stretched public finance. This is, of course, in addition to the tension surrounding the upcoming round of credit rating reviews."
 
She pointed out that, amid these challenges, Michael Sachs, the head of the budgeting office at the Nation Treasury resigned allegedly due to interference in the budgeting process.

"Not only did the announcement add further political pressures to the rand, but it also coincided with the US dollar trading stronger as the increase in US bond yields observed last week, supported the greenback," she added.
 
The rand woes added to the 1% depreciation against the US dollar last week and it reached R14.51 by midday against the greenback (after opening the start of the day’s trading session at R14.35 again the US dollar.

The yield on the South African 10-year bond also ticked up to 9.4 after starting the trading session at the 9.3 mark.

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