Gordhan uncertainty leaves markets on tenterhooks

The rand extended its weakness on Tuesday, slumping by nearly 1% against the US dollar, as uncertainty mounted about whether finance minister Pravin Gordhan would be fired by President Jacob Zuma.

After rallying to the R13 level against the dollar between 8:35 and 13:30, the local unit retreated to R12.90 for the remainder of the day. At the time of writing the rand was trading at R12.89.

Fears of a cabinet reshuffle were sparked by Zuma’s decision on Monday to cut short an investor roadshow in Britain that would be attended by Gordhan, his deputy Mcebisi Jonas and business leaders, to drum up foreign investment in South Africa.

The uncertainty wiped off the rand’s strength over the past two weeks, which was helped by the weakness in the dollar and expectations that the US Federal Reserve might hike interest rates throughout 2017. Zuma didn’t provide reasons for his decision, which has rattled investors.

Gordhan returned from Britain on Tuesday and briefly attended a hearing at the North Gauteng High Court in Pretoria about the closure of bank accounts of Gupta-controlled Oakbay.

Gordhan told Eyewitness News yesterday afternoon that he is still finance minister, despite earlier reports that his dismissal had been discussed by the South African Communist Party and Zuma during a late night meeting on Monday.

Market watchers say that Gordhan’s confirmation that he is still finance minister provided respite for the markets.

SA ten-year government bonds rose by 36 basis points reaching a high of 8.94% since Gordhan’s recall and a further 14 basis points on Tuesday. However, bonds recouped some of the losses, retreating to 8.7%. Higher bonds mean that government’s borrowing costs in the long term will rise.

Ashburton Investments’ senior portfolio manager Wayne McCurrie says the rand will continue to weaken until the markets get a definitive answer on Gordhan’s fate.

“Should the finance minister be replaced; the rand could go to R14 to R15.  And if Gordhan is not being replaced the rand will go down to R12. But at the moment, there are so many conflicting reports,” McCurrie says. He adds that the weakness in the rand might result in higher interest rates in South Africa despite expectations that rates might be put on hold or cut throughout 2017 by the Reserve Bank.

“Lower inflation is off the table because a weaker rand wouldn’t produce more inflation in the system. The petrol cut that we would see soon is off the table,” says McCurrie.

Managing director and chief economist at ETM Analytics George Glynos says the tremendous amount of uncertainty is not conducive to building trust with foreign investors. “When a finance minister is on a roadshow, you try and encourage foreign investors to buy South African bonds. The last thing you do is scupper a roadshow, which is critical for SA to have stable financial markets, foreign participation and a healthy dose of it,” says Glynos.

Gordhan’s recall comes at a time when South Africa escaped a downgrade to junk status, with rating agencies Fitch and Standard & Poor’s placing the country’s sovereign rating one notch above junk. On the other hand, Moody’s placed SA two notches above junk. Moody’s is due for credit rating review next week.

Cas Coovadia, MD of the Banking Association South Africa, says business, government and the labour market had made progress in the past year to rebuild confidence among rating agencies and foreign investors. The latest uncertainty would risk undoing the progress made, he says.

Brought to you by Moneyweb

For more news your way, follow The Citizen on Facebook and Twitter.