The rand is not having a good start to the week.
The South African currency followed yesterday’s sell-off with another drop of more than 2 per cent in less than 20 minutes on Tuesday morning, after reports that the president is planning to fire finance minister Pravin Gordhan.
The move prompted speculation that Mr Zuma was planning a cabinet reshuffle to remove Mr Gordhan, with whom he has been engaged in a long-running power struggle.
Bloomberg reported this morning that Mr Zuma has told some of the African National Congress’ Communist allies that he plans to remove Mr Gordhan.
The rand dropped as much as 2.7 per cent after the report, and at publication time was down 2.1 per cent, at 13.0115 per dollar.
Investors also sold South African government bonds, with yields on the country’s benchmark 10-year debt, which rise when prices fall, rising as much as 12.5 basis points (0.12 percentage points), building on a 32.7bps climb on Monday. By mid-morning they had recovered slightly, but yields were still up 6.9bps, to 8.775 per cent.
The government’s internal battles have repeatedly dented the currency’s long rally, which had made it the best-performing currency in the world over the last year until this week (it has since fallen behind the rouble).
Mr Gordhan is popular with international investors and has helped the country hold on to its investment-grade credit ratings, but Mr Zuma has sought a more pliant finance minister who will support his plans for more fiscal expansion.
The two have also clashed over the influence of the Guptas, a prominent business family who are friends with Mr Zuma and have been accused of having undue political influence.
Analysts at Citi said a reshuffle affecting the finance ministry would be “unambiguously market-unfriendly”, and would make a downgrade of the country’s debt to junk status more likely. They added, however, that “we would not rule out a scenario where the apparent urgency is followed by frustrating silence from the Presidency’s side”, a situation which could allow bonds and the currency to recover.
While previous drops in the rand have been reversed relatively quickly, Esther Reichelt, analyst at Commerzbank, thinks it could have some way further to fall this time.
It was exactly these continued tensions within the South African government that caused us to take a more sceptical view towards the ZAR rally in recent weeks. Medium term we consider USD-ZAR levels around 13.50-14.50 to be more justified.
Koon Chow, a strategist at UBP who met with Mr Gordhan before he was recalled on Monday, said the finance minister was still making jokes “despite the cloud hanging over him”. He said:
I suspect that he was mentally resigned to something happening to him today and probably knows that if he is thrown out today, his reputation is strong and he could very well return as the backlash could hasten Zuma’s demise.