Rand, banks and bonds hit as Zuma fires Gordhan

by: Nicholas Megaw in London

South African president Jacob Zuma’s dismissal of his well-regarded finance minister Pravin Gordhan has left the country’s currency on course for its worst week since 2015 and hit prices in the country’s government bonds and its banking stocks.

It has also left analysts expecting imminent downgrades to the country’s credit ratings.

The firing of Mr Gordhan — which was announced late on Thursday night along with the purge of eight other cabinet ministers — sent the rand as much as 2.5 per cent lower to 13.63 against the dollar in early trading in London on Friday. Yields on the country’s benchmark 10-year bonds, which rise when prices fall, were up 32.5 basis points to 8.813 per cent.

The FTSE/JSE Africa Banks Index, meanwhile, was down 5.5 per cent, its biggest one-day drop since December 2015 — the last time president Zuma sacked his finance minister.

Timothy Ash, an emerging markets specialist at BlueBay Asset Management, said that the reshuffle was a “huge move by Zuma,” which meant the president was “taking the reformers and markets on, head on”.

According to Peter Attard Montalto at Nomura, even after Friday’s selling, the market’s assessment of South African assets was looking too optimistic.

“This is an attack on the institution of the National Treasury and as such will trigger multiple downgrades . . . Zuma believes he is, and we think he is, much stronger than the market thinks he is. The market has a lot of catching up to do still I think to the reality on the ground.”

The exit of Mr Gordhan, who had been in the role since late 2015, caps a tumultuous week for South African investors that began with the president abruptly calling back his finance minister from a set of meetings in London on Monday.

Malusi Gigaba, who previously served as the country’s home minister, will succeed Mr Gordhan.

Mr Zuma and Mr Gordhan have been at loggerheads for months, with the latter’s insistence on fiscal discipline and taming inflation frustrating his boss’s spending plans.

1. President Jacob Zuma replaces finance minister with unknown backbencher
2. Pravin Gordhan appointed new finance minister
3. Media leaks reveal Mr Gordhan received a letter from the Hawks, a special police force, questioning him about a South African Revenue Service unit
4. The Hawks accuse Mr Gordhan of failing to meet deadlines to answer its questions
5. South Africa’s presidency denies Mr Gordhan faces arrest over the investigation
6. Mr Gordhan says he will not comply with a request to appear before an investigative unit of the police
7. Mr Gordhan summoned to face fraud charges
8. Presidency orders Mr Gordhan back to South Africa from roadshow

Analysts say the extent of the fallout in financial markets will now depend in part on how credit rating agencies react to the cabinet changes. Mr Gordhan has been seen as key to the country’s success in preserving its investment grade rating.

South Africa’s central bank on Thursday kept its benchmark interest rate at 7 per cent, but warned that Mr Zuma’s battle with his finance minister threatened to undermine that fight against inflation.

Koon Chow, a currency strategist at UBP, said that “Zuma’s decision is likely to make a Moody’s downgrade on the 7 April from Baa2 to Baa3 all but certain. Moreover the decision has a high probability of pushing S&P and possibly Fitch to downgrade South Africa to sub investment grade around the mid year review time.”

The testing week for the rand comes as emerging market currencies enjoy a stellar quarter, thanks to signs of strength in the global economy, buoyant trade flows and signals from the US Federal Reserve that it will raise interest rates in a measured way.

Mr Ash of BlueBay pointed to this backdrop for what he described as a “modest” reaction in the foreign-exchange market. “Working in Zuma’s favour is the supportive market backdrop — investors at present want to be long EM risk . . . This could support South African markets at least in the short term.”

Despite this week’s turmoil, the rand remains up just over 2 per cent against the dollar for the year.

Additional reporting by Hudson Lockett, Joseph Cotterill and Richard Blackden