Cape Town - The rand fell for a sixth day in the longest streak of losses since November 2013, stocks slid and bond prices tumbled the most on record after South African President Jacob Zuma fired finance minister Nhlanhla Nene and replaced him with a little-known lawmaker.
The currency dropped as much as 5.2 percent on Wednesday to an all-time low of 15.3857 per dollar before paring losses in overnight trading. The rand was down 0.4 percent at 15.0320 as of 9.45am in Johannesburg, taking losses over the past five days to 4.5 percent, the biggest decline among 31 major and emerging-market currencies. Almost three shares fell for every one that gained on the benchmark all-share equity index, with a gauge of banking stocks declining by the most since May 2010.
Nene was removed from his position after 19 months and ahead of his “deployment to another strategic position”, Zuma said in an e-mailed statement on Wednesday, without providing more detail. He was replaced by David Van Rooyen, who serves as a parliamentary member on committees for finance and economic transformation.
“This is a big negative, especially because Nene was seen as someone who was moving in the right direction,” Ilke van Zyl, an economist at FirstRand’s Johannesburg-based investment banking unit, said by phone. “Because we don’t know the new man and we all have to get to know him now, and we are already at a very sensitive point in the projections of our fiscal position, we think this is a negative.”
Record drop
Yields on rand-denominated debt due December 2026 jumped 64 basis points to 9.46 percent, the highest since October 2008 and resulting in the biggest drop in prices on the bond on record. The FTSE/JSE Africa Banks Index dropped 4.6 percent to the lowest since October 2014, with Standard Bank, the nation’s biggest lender by assets, plunging 5.1 percent.
The rand’s three-month implied volatility against the dollar climbed 13 basis points to 17.2 percent, suggesting options traders expect wider price swings in the currency in coming months. The premium of options contracts to sell the rand versus those to buy it, known as the 25-Delta risk reversal, jumped 105 basis points to 3.73 percentage points, the most since October 7.
Shake-up
The cabinet shake-up, the sixth since Zuma took office in May 2009, creates more uncertainty for an economy struggling to cope with plunging metal prices, credit-rating downgrades and power constraints. On December 4, Fitch Ratings cut the country’s credit rating to BBB-, one level above non-investment grade, while Standard and Poor’s lowered the outlook on its equivalent rating to negative, bringing the nation a step closer to junk status.
“This is monumentally bad timing after a downgrade,” Peter Attard Montalto, an economist at Nomura International, said from London. “This is very ratings negative and increases the risks of contingent liability shocks in the future. It is an erosion of a previously strong-standing institution.”
Nene, 57, took over the finance ministry from Pravin Gordhan in May 2014 after previously serving as deputy finance minister. He has struggled to keep debt under control as falling commodity prices and electricity shortages curbed economic growth. In October, he cut the growth forecast for this year to 1.4 percent, well short of the 5 percent the government is targeting by 2019 to address a 25.5 percent unemployment rate.
Gross debt
Gross debt has surged from about 26 percent of gross domestic product before the 2009 recession to reach almost 50 percent this year. While Nene has sought to contain spending in a bid to rein in a widening budget deficit, his efforts have been frustrated by the government agreeing to give workers above-inflation wage increases over three years.
“While the rating agencies are unlikely to downgrade on this news alone, as they will likely wait to see how the change affects fiscal policy, it might leave them with their fingers on the trigger,” Barclays analysts, including Peter Worthington and Miyelani Maluleke, said in an emailed note. “Markets are interpreting the cabinet reshuffle as a blow to the institutional credibility of the National Treasury.”
Van Rooyen become involved in politics in the 1980s and joined the armed wing of the African National Congress during its struggle against white minority rule. He held several leadership positions in the party after it took power in the first all-race elections in 1994, according to the website of the People’s Assembly, a group that monitors Parliament.
His qualifications include a master’s degree in public development and management and another in finance from the University of London, according to the website.
“The announcement comes as a shock,” said Steve Swart, a lawmaker for the opposition African Christian Democratic Party who sits on the finance committee. Van Rooyen is relatively knowledgeable on financial matters, “but clearly he hasn’t got the experience that Minister Nene has had. The question is to what degree will he back the National Treasury and keep the government expenditure ceiling in place,” said Swart by phone.
* With assistance from Amogelang Mbatha, Paul Vecchiatto and Robert Brand
BLOOMBERG