Johannesburg - South Africa's rand hit a two-month low against the dollar and government bonds weakened sharply on Monday after a newspaper report, denied by the government, that Finance Minister Pravin Gordhan faces arrest.
The police and the presidency also dismissed the Sunday Times article, which cited unnamed sources saying Gordhan would be arrested in a case related to the activities of a spy unit formed when he headed the tax revenue agency.
Read: Gordhan arrest talk just 'rumours'
But the rand traded at 15.4880 versus the dollar, 0.51 percent weaker from Friday's New York close. The unit hit 15.6800 per dollar before trade in Johannesburg opened, its weakest level since March 17, according to Thomson Reuters data.
At 08h50 GMT, the yield for the benchmark government bond due in 2026 was up 9.5 basis points at 9.295 percent, after jumping as much as 17 basis points in early trade.
Shares rose took some strength from mining stocks boosted by rising base metals prices. The Top-40 index was 0.94 percent firmer, while the broader all-share rose 0.82 percent.
Read: Rand softer in nervous trade
“Political risk has come to the fore again as the Sunday Times reported that the Hawks are just waiting for political guidance to arrest the finance minister. The presidency has strongly denied this. We take them at their word,” Rand Merchant Bank analyst Isaah Mhlanga said in a note.
“The markets will, nevertheless, remain nervous; sensitivities on this issue are very high and the political dynamics will change after the local election (due in August).”
Neither Gordhan nor the Treasury were available to comment on Monday, but South Africa's Beeld newspaper, citing several sources it said were close to Gordhan, reported he was aware of the plans to arrest him and would not be intimidated.
The market reaction to the news reports, for all the official denials, has raised concerns of a repeat of the run on the rand and bonds in December after President Jacob Zuma changed finance ministers twice in a week.
South Africa’s elite police, the Hawks, said in March they would investigate Gordhan's role in setting up a tax surveillance unit in 2007 when he was the commissioner of the South African Revenue Service. Gordhan has said at the time that the spy unit set up at the tax agency was lawful.
The reports over the Hawks investigation comes at a time when South Africa is trying to fend off a credit ratings downgrade, while the economy is estimated to grow less than 1 percent this year.
Gordhan is scheduled to hold meetings with rating agencies Fitch and Standard & Poor's in the next few weeks after Moody's left its rating of South Africa's debt at Baa2, two levels above sub-investment grade.
Fitch and S&P have the country just one notch above subinvestment grade, and a due to release their reviews in June.
“I think overseas money managers are not going to be happy to see the political scene gather headlines for the wrong reasons again. Especially after things seemed to have settled down a little,” Standard Bank currency trader Warrick Butler in a note.
REUTERS