Johannesburg - Rand weakness lies ahead, according to economists, while local markets this week will be guided by developments in the long-standing feud between the Hawks and Finance Minister Pravin Gordhan.
The rand plummeted last week and reversed recent gains after the Hawks summoned Gordhan in what was generally seen as a precursor to his arrest in relation to the establishment of a covert unit at the SA Revenue Service (Sars). Gordhan was the Sars commissioner between 1999 and 2009.
Mamello Matikinca, a First National Bank economist, said having lost almost a full rand to the dollar last week, even the encouraging trade figures due this week were unlikely to drive the rand stronger.
The rand on Friday showed glimpses of relative strength against the dollar. On Friday, the rand was R14.21 to the dollar just after 10am but strengthened to R13.96 around 4.20pm. It was R14.06 at 5.11pm.
Despite the expression of support for the finance minister by President Jacob Zuma and his deputy Cyril Ramaphosa last week, speculation continued that the investigation was politically motivated. Prior to the new political tensions and uncertainty about Gordhan’s fate, the rand was the best-performing emerging market currency this year.
Investec’s chief economist Annabel Bishop said the rand had plummeted from around R13.45 to the dollar on the general risk-on sentiment towards emerging markets since the latter part of May to R14.32 on the unexpected news Gordhan could be criminally charged.
She said if Gordhan was unable to complete his term, and his replacement was not seen as able to deliver the degree of fiscal consolidation required, the rand could weaken towards R19 to the dollar and R25 to the pound as foreigners offloaded South African portfolio assets - with up to 40 percent of these bonds and equities estimated to be held by non-residents.
Bishop said: “If credit rating agencies believe that the degree of fiscal consolidation currently outlined in the budget for the next few years is at a real risk of not materialising, then it becomes very likely that South Africa’s credit rating will drop to speculative grade. A sub-investment grade credit rating, which raises the country’s cost of borrowings, would then make it likely that further credit rating downgrades could ensue.”
Deterioration
She said the risk then was that a downward spiral developed, where higher borrowing costs and rising fiscal debt ratios to gross domestic product would result in more deterioration in government finances, leading to the extreme down case of a sovereign debt default.
In such a situation, the rand would probably move towards R30 and R40 to the dollar.
In a Reuters poll of 23 economist surveyed last week, the majority expected South Africa’s credit rating to be cut to junk status this year.
Bank of America Merrill Lynch predicted R16 to the dollar by the end of the year.
Merrill Lynch said the expectation of a ratings downgrade from S&P Global Ratings would also contribute to the currency’s depreciation.
In a research note, Merrill Lynch said it expected the SA Reserve Bank to raise the repo rate to 7.5 percent next January, instead of November. A weaker rand poses risk to the inflation outlook as imported goods become more expensive.
Macquarie senior economist Elna Moolman said the impact of the rand’s partial reversal of its gains on one’s inflation forecasts would depend on the assumptions originally underpinning such forecasts.
Moolman said, even prior to the recent weakness, Macquarie felt that the latest bout of the currency’s appreciation was not entirely sustainable.
“Our inflation forecasts are thus based on an assumption that the rand would weaken back to levels of around R14.50 (to the dollar) by year-end and through 2017. We have not changed our inflation forecasts in response to (the) rand partly reversing its recent gains. We expect consumer price index inflation to average 6.4 percent (this year) and 5.8 percent (next year). We do not expect the (central bank) to change interest rates,” she said.
Meanwhile, it is now being reported by other publications that Gordhan allegedly told Treasury staff that he was being targeted by the Guptas.
Under investigation
The Guptas’ businesses are under investigation, with investigations by the Treasury into alleged corruption relating to their business dealings with state-owned companies.
The Gupta family said on Saturday that it planned to dispose of all stakes it held in South African businesses.
The Gupta family said “we now believe the time is right for us to exit our shareholding of the South African businesses” and it believed the move would benefit its current employees.
“As such, we announce today our intention to sell all of our shareholding in South Africa by the end of the year. We are in discussions with several international prospective buyers,” the Guptas said.
Eskom said yesterday that it “continues to co-operate with the Treasury on its coal contract probes”, including Tegeta Exploration and Resources.
* With additional reporting by Reuters
BUSINESS REPORT