- News that President Cyril Ramaphosa could be ousted sent the rand and local stocks tumbling this week.
- Some analysts warn that the weakening of the rand could extend if there is less clarity about the future of Ramaphosa.
- So far this year, the rand has lost 9% against the dollar.
- For more financial news, go to News24 Business Cover.
The scandal threatening the future of Cyril Ramaphosa’s presidency rocked South Africa’s financial markets this week and the instability risks inflicting further damage on the country’s currency and bonds.
There is no obvious long-term successor to lead the country if the crisis ends up costing the president his job, so it is unclear what will happen to his reform agenda, which is aimed at jump-starting one of the largest economies in Africa. That, investors say, is a recipe for bigger swings in the rand, whose implied volatility this week spiked to a level last seen in 2020 as the global economy has been reeling since the start of the covid pandemic.
“The immediate focus remains whether the president resigns or continues to fight,” Matete Thulare, head of currency execution at Johannesburg-based Rand Merchant Bank, said in a note to clients. “Rightly or wrongly, if he leaves, willingly or not, the rand will run again.”
READ | Ramaphosa’s resignation would create chaos, says Mantashe
When it became known that Ramaphosa could face impeachment due to a possible constitutional violation, traders responded by cutting the currency and raising the country’s borrowing costs to the highest since 2015. The cost of insuring debt against default rose and the South African bank shares posted their worst one-day loss in more than two and a half years.
The rand enjoyed a bit of respite on Friday, paring some of its weekly slide after Finance Minister Enoch Godongwana said there was only a 10% chance Ramaphosa would step down. African National Congress (ANC) officials are expected to continue discussing the matter over the weekend, and investors are eager for updates.
The nation’s currency, often seen as a gauge of risk appetite in emerging markets, has lost about 9% against the dollar so far this year. The rand closed Friday at 17.5052 to the dollar, and the yield on 10-year local sovereign bonds was 11.3%.
“It’s a very fluid situation, and anything can still happen,” said Brad Bechtel, a New York-based currency strategist at Jefferies. “Even if he steps down, it won’t change the broader context in South Africa, which still has some challenges ahead.”
READ | Carol Paton | Ramaphosa: It’s not over until it’s over
For Wells Fargo Securities strategist Brendan McKenna, the president’s resignation could leave a leadership gap that would fuel political risk and drag down the nation’s assets. But even the decision to stay could call into question the strength of the ANC and cause long-term market pain, he warned.
The scandal risks damaging the party’s credibility, as Ramaphosa was once touted as an anti-corruption figurehead, helping the rand soar 27% between November 2017 and February 2018. Since then, he has struggled to meet his reform agenda or boost economic growth, with the country’s unemployment rate among the world’s worst and greatest challenges stemming from the electricity sector.
Goldman Sachs Group Inc. analysts also warned that the rand’s recent weakness could extend further if clarity remains elusive for an extended period. “A prolonged process could imply greater downside currency risk,” economists Andrew Matheny and Bojosi Morule said in a note.
-With the assistance of Leda Alvim.
