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.After gradually gaining ground in March, the rand weakened 2.6 percent against the dollar on March 15 after a specialist police unit known as the Hawks said it 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 a deputy minister said he was offered the finance minister’s post by Zuma’s friends, allegations that may undermine the president’s power.
Standard Chartered Plc 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.
At the end of last week, traders were pricing in a 55 percent chance the Reserve Bank will increase the repurchase rate by 25 basis points to 7 percent. That probability increased to 79 percent on Wednesday, according to forward-rate agreements starting in one month, used to speculate on borrowing costs.
The rand fell 0.4 percent to 15.7282 against the dollar as of 8.40am in Johannesburg on Thursday. Yields on the rand bonds due 2026 gained 5 basis points to 9.47 percent.
Reserve Bank Governor Lesetja Kganyago is contending with inflation above the 3 percent to 6 percent target band and an economy that’s set to grow less than 1 percent this year. The Monetary Policy Committee raised the benchmark interest rate by half a percentage point in January.
The rand, which has dropped 3.2 percent 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. The president backtracked four days later and reappointed Gordhan to a post he had held from 2009 until 2014.
Moody’s Investors Service is reviewing South Africa’s credit rating this week for a possible downgrade to one level above junk.
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.”