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SA’s moment of reckoning could make it watershed week for rand

Aug 07 2017 14:28

Cape Town – The no confidence vote against President Jacob Zuma in Parliament and the ratings review by Moody’s could make it a watershed week for the rand, analysts cautioned on Monday.

“This could be a watershed week for the rand with the possibility of two-way trading being very high,” TreasuryOne explained, while Rand Merchant Bank analyst Isaah Mhlanga said “this week we have our own moment of reckoning”.

First, there is the vote of no confidence against Zuma in Parliament on Tuesday. Speaker Baleka Mbete is set to announce whether the vote will be cast in secret on Monday at 15:30. Political analysts believe a secret ballot would see Zuma voted out of power, and many believe Mbete will not take this route.

"If she does not allow a secret ballot, weekend newspapers expect opposition parties to take the speaker to court as an open vote does not protect MPs from intimidation,” explained Mhlanga in a morning note.

The rand’s drop in value from about R13.00 to R13.40 to the dollar between Friday and Monday might be that the market has priced in Mbete’s rejection of a secret vote, according to TreasuryOne.

Other factors for the decline include rumours “that there were massive corporate flows” or the Moody's report which “questioned the independence of the Reserve Bank and concerns around growth”.

“With no definitive cause, we can assume that the rand was battered by all three these forces and has driven sentiment more to the downside,” it said.  

Regarding Mbete’s decision on Monday, TreasuryOne said the market will be volatile pre and post the decision.

“This decision is balanced on a knife's edge with a little more of the bias tilted towards the speaker saying ‘No’ for a secret ballot and the motion of no confidence to not succeed.”

On Friday, Moody’s will issue its rating review. “The expectation is that there will be no change in the rating from Moody’s, but should there be a rating downgrade we can expect massive outflows out of South Africa and the rand to take a bit of a knock.”

Moody’s currently has South Africa'S foreign debt ranking one notch above junk status, while its peers S&P and Fitch have downgraded this rating to “junk”.

Mhlanga said Rand Merchant Bank does not “expect any change from the agency given that not much time has passed and nothing much has happened since the last rating”.

Regarding the vote, Mhlanga explained that for the vote to succeed, 201 MPs must vote for the motion, which is possible if 50 or more of the 250 ANC MPs vote with the 150 opposition MPs.

“It will not be a surprise if the vote fails due to MPs voting by party line, and the ruling party has spoken against MPs who indicated their willingness to vote for the motion.

“The risk we think is underestimated if the vote succeeds and Parliament fails to elect a new president within 30 days. That opens the possibility for fresh general elections, which we think none of the opposition, the ruling party, the Independent Electoral Commission and the country are prepared for.

“In such a scenario, USD/ZAR will likely rally if the motion succeeds but the uncertainty that may come after that could weaken the currency again.”

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