South Africa’s rand tumbled in late trading on Monday after a rating agency cut the country’s coveted investment grade status, leaving President Jacob Zuma’s decision to fire his finance minister responsible for wiping out almost all the currency’s gains for the year.
The rand slid to R13.7 against the dollar, taking its drop in the past five days to almost 9 per cent. Having recorded a gain of as much as 11.5 per cent for the year before the current bout of political turmoil, the rand now lags behind almost all emerging market currencies.
Late on Monday, S&P cut its rating on South Africa to double B plus from triple B minus, adding that its outlook on the country’s credit was “negative”. Rival agency Moody’s is scheduled to deliver its assessment on Friday
“It will be interesting to see how that filters through the political environment,” said Luis Costa, an analyst at Citigroup, about the decision.
The dismissal late last week of Pravin Gordhan, who as finance minister won respect from investors for his fiscal discipline, has prompted a backlash from business leaders, criticism from within the ruling African National Congress and opposition calls for a vote of no-confidence in Mr Zuma.
However, despite the rand’s decline in recent days, some in the foreign exchange market said that the fallout in the market had been mild compared with previous episodes of political turmoil in South Africa.
Rand’s drop against dollar over past five days
When currency volatility hits South Africa, it tends to yield “spectacular results”, said Simon Derrick, a currency specialist at BNY Mellon, and the rand’s dramatic collapses in the past two decades serve as “an almost perfect example of what happens when a carry trade target currency collapses”.
The rand has proved to be attractive for investors pursuing a carry trade strategy in which they borrow a currency with a low interest rate to fund the purchase of currencies with high rates.
Analysts at Citigroup said that institutional investors and hedge funds have reacted to Mr Zuma’s purge of his cabinet — a total of nine cabinet ministers were sacked — in “a very mild fashion”. Foreign flow-buying was unaffected, and investors “continue to pile in despite the noise”, they said.
The market’s relatively contained reaction reflects a sense that sacking Mr Gordham may ultimately hurt the president and hand momentum to reformists, according to UBS. But the Swiss bank believed the rand would again come under pressure from thinner portfolio flows and a weaker credit profile.
Mr Derrick pointed to the trend for lower volatility in the rand since the middle of 2016. “In other words, there is nothing particularly untoward about the price action at present despite the recent political turmoil,” he said.
Although the currency has had a testing few days, the Turkish lira remains the worst-performing major emerging market currency this year.
S&P said the president had “put at risk fiscal and growth outcomes” with last week’s cabinet reshuffle.