Johannesburg – The rand has not dipped as much as may
have been expected because the Cabinet reshuffle was anticipated.
This is according to Novare’s Actuaries & Consultants
economic strategist Tumisho Grater.
Late on Thursday, President Jacob Zuma removed both Finance Minister Pravin Gordhan
as well as his deputy Minister Jonas. The current Minister of Home Affairs,
Malusi Gigaba, will now lead the Finance Ministry, joined by Sifiso Buthelezi
as the new deputy.
Grater says, the rand’s reaction, although negative, has not been as aggressive as one would
have imagined it would be.
After
dipping below R13.00 against the US dollar in Thursday’s trade, once the news
regarding the axing of former Finance Minister Gordhan was known, the local
unit hit R13.45 to reach a high of R13.60 on Friday morning.
By
mid-morning, the rand was trading below R13.50 against the greenback while the
bond market has seen the 10-year bond yield peak at 9 percent today - up from
8.3 percent a week ago. Local markets opened weaker, weighed down by financials
that were down by over 3 percent in the first hour of trading.
Grater says it’s important to highlight that the rand has also found support in
the improved global economic backdrop, favourable terms of
trade, a narrowing in the current account deficit and attractive carry trade.
Read also: Assets tumble on Gordhan sacking
“In
terms of a less aggressive move, we may be witnessing the scale
tilting towards the supportive global factors as opposed to the negative local
political developments. Some also foresee that a dramatic turn of events could
still occur that would result in the outcome being reversed or some stability
being restored from other forces within the ruling party or opposition.
Subsequently, the weekend and the events that may follow will be closely
watched.”
In
addition, says Grater, the five-year S.A. credit default swaps (CDS) spreads ticked up from last Friday’s
close of 193.5 basis points to the current level of 223 basis points -
reflecting an increase in the country’s perceived credit risk by investors.
“The
degree of unpredictability and instability presented by the recent
political events have not only caused the rand to weaken, but also further
eroded the much-needed confidence that is required for capital investment which
would be supportive of economic growth and job creation.”
Grater adds, from a credit rating’s perspective, the removal of a Finance
Minister in this manner may be viewed as a deterioration in South African
structures and, therefore, may have a negative consequence.
“Although
political developments are not the only factor that credit rating agencies take
into account, this could have an impact on other pillars that are taken into
consideration, such as institutional strength and economic growth.
“Another
factor that credit rating agencies will consider is the commitment to the
reform agenda. Should momentum be slowed or lost in the perceived Finance
Ministry-driven reform initiatives, such as on procurements and SOE governance
reforms, some of the contingent liabilities may affect the balance sheet of the
sovereign, which is again a big negative,” says Grater.
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