Five years ago, Cyril Ramaphosa’s rise to power fueled a euphoric rally in South African assets that coined a new word: Ramaphoria. On Thursday, a financial scandal threatened to end everything in defeat.
The nation’s currency fell towards its worst decline in six years and the government’s borrowing costs rose the most since 2015 when the president considered resigning over possible breaches of the constitution related to the theft of hidden $580,000 (R10.2 million). on a hunting farm. of the. Options traders bet on the most volatility in the currency in two years, and the cost of protecting against a sovereign default rose to the highest in the same period.
The change marks a stark contrast to the market reaction between November 2017 and February 2018, when Ramaphosa emerged as a replacement for Jacob Zuma’s scandal-plagued tenure.
His reform agenda and clean image helped fuel a 27% rally in the rand in that period. Money managers now say it has failed to achieve the policy changes needed to boost growth in the country, considered a benchmark for emerging markets. Rampant unemployment at around 33% and ongoing disarray in the power sector have reduced the markets’ confidence in it, with the latest political crisis pushing them over the edge.
“The market fears political instability and often would rather go with the devil they know than the devil they don’t,” said Cristian Maggio, head of portfolio and ESG strategy at TD Securities in London.
“But Ramaphosa’s reform agenda has been disappointing, to say the least. Questions will remain as to whether another candidate can drive that process forward, but surely we know that Ramaphosa is unlikely to deliver what is needed.” The leadership crisis sent the rand down as much as 4.2% to 17.9596 per dollar, at a point set for the biggest daily loss since November 2016. The currency pared some of those losses to end the session lower. 2.6% to three week low at 17.6574.
Some more reactions from the market:
The 10-year rand sovereign bond yield rose as much as 84 basis points to 11.64%. The yield on the 10-year dollar bond rose 51 basis points to 7.46%.
The one-week implied volatility in the coin, based on option prices, shot up 5 percentage points to nearly 21%. Credit default swaps, used to hedge against South Africa’s default risk over the next five years, rose 30 basis points to 274.
An index of bank shares plunged as much as 7.7%, the biggest drop since May 2020.
“The likelihood of Ramaphosa lasting another full term seems very low to me now,” said Kieran Curtis, London-based investment director at abrdn.
The one-week implied volatility of the rand is at its highest level since November 2020.
South Africa’s currency is no stranger to defeats brought about by political drama. It fell as low as 5.2% on December 9, 2015, when President Zuma fired then-Finance Minister Nhlanhla Nene and replaced him with a little-known lawmaker. The rand plunged 9.2% in five days to April 3, 2017 when Zuma sacked another finance minister, Pravin Gordhan.
Thursday’s losses in South Africa came amid gains in global stocks, bonds and currencies after Federal Reserve Chairman Jerome Powell signaled the central bank may slow the pace of monetary tightening and a Chinese official in charge of pandemic controls indicated that the strict rules could be relaxed.
