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Here we go again.
Political worries are once again nibbling at the South African rand, after president Jacob Zuma’s latest unorthodox government appointment raised investor fears that he could try to unseat the country’s internationally-respected finance minister.
The currency weakened as much as 1 per cent against the dollar on Tuesday, and has now retreated more than 2 per cent from the 15-month high it hit last week, to 13.1425 per dollar.
The pullback comes as finance minister Pravin Gordhan prepares for his annual budget speech on Wednesday. Mr Gordhan faces the difficult prospect of convincing his party to cut costs or increase taxes when the economy is already struggling with weak growth.
Citi analyst Adriaan Du Toit warned this week that Mr Gordhan “could struggle to bolster perceptions regarding fiscal sustainability in this week’s tabling of the 2017 National Budget”.
However, a contentious budget speech is not the only potential problem facing the finance minister tomorrow. Wednesday also marks the swearing in of Brian Molefe, the former chief executive of Eskom, South Africa’s power utility, as an MP.
Mr Molefe previously led the powerful Public Investment Corporation and worked in the national treasury, but resigned from Eskom in November after being named in a report into alleged graft and cronyism in the nation’s key institutions. South Africa’s public prosecutor accused Mr Molefe and the Eskom board of a “severe violation” of public finance laws, though Mr Molefe denied any wrongdoing.
His sudden appointment has prompted speculation that Mr Molefe will replace Mr Gordhan in a cabinet reshuffle, or be appointed as his deputy in an attempt to increase the president’s influence in the Treasury.
Mr Gordhan, who has been at the forefront of efforts to rein in government waste and corruption, has become a serious thorn in the side of Mr Zuma. Fraud charges levied against the finance minister last year were widely seen as an attempt by Mr Zuma to force out Mr Gordhan and replace him with a more pliant minister.
The latest worries prompted analysts at Deutsche Bank, who have been bullish about the rand in recent months, to recommend taking profits, despite their faith in a fundamental economic turnround.
We have been able to look through the political noise around speculation of a cabinet reshuffle up to now. However, the latest shift to elevate Brian Molefe to parliament could mean that risk around a cabinet reshuffle, specifically aimed at replacing the finance minister or his deputy, has increased. Not only does this threaten the outlook for the exchange rate in the short-term, it also heightens the risk of a credit downgrade by creating concerns around the fiscal consolidation.
Mr Gordhan’s speech will begin at 14.00 local time on Wednesday (12.00 GMT).