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South African government bonds and banking stocks plummeted on Friday morning as analysts prepare for imminent downgrades to the country’s credit ratings, after the nation’s president dismissed his finance minister Pravin Gordhan and eight other cabinet members overnight.

Jacob Zuma had been engaged in a power struggle against Mr Gordhan for months, and he sacked him in a late-night cabinet meeting on Thursday night.

At publication time, yields on the country’s benchmark 10-year bonds, which rise when prices fall, were up 32.5 basis points (0.325 percentage 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. The rand, which at publication time was 1.4 per cent weaker for the day, is on track for its worst week since the same date.

The president’s conflict with Mr Gordhan has repeatedly dented the rand’s rally over the last year but, while previous falls have generally been reversed fairly quickly, many analysts are sceptical that it will be as easy this time.

Peter Attard Montalto at Nomura stressed that “this is not over yet”, and said many in the market are still being too optimistic.

This is an attack on the institution of the National Treasury and as such will trigger multiple downgrades.

The market has been far too complacent that Zuma cannot remove PG but he has now gone and done it and yet the market is still hanging onto the hope of a credible candidate which has not come with a complete clear out at NT. This is a full whack Zuma led reshuffle which will lead to multiple imminent downgrades where Zuma is confident he has the upper hand over weak internal ANC opposition. The market will be watching blowback risk now as the next reason to be too positive on this. The opposition to Zuma is too split with too weak a leadership in the NEC to be effective here. 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.”

Timothy Ash at Bluebay Asset Management agreed that markets have yet to price in the full importance of the reshuffle, saying the relatively modest moves in the rand overnight “are frankly bizarre”.

He said South African assets may be supported in the short term by positive sentiment toward emerging markets in general, but added: “short term Zuma could succeed, but if he does this will likely change the character of the country in a meaningful way, and in the process make the longer term investment story much more challenging”.

Lutz Karpowitz at Commerzbank said the latest developments will create new headaches for the South African Reserve Bank. The central bank had hoped it was at the end of its easing cycle and could even move toward lowering interest rates as the strong rand helped bring down inflation, but its governor warned yesterday that the recent political instability threatened that outlook.

Mr Karpowitz said:

In an environment of increasingly open corruption within the government the only guarantor for the rand is the central bank. The fact that it left the key rate at 7 per cent yesterday almost got lost amongst the frenetic developments. Let’s wait and see how long it takes until the weak rand forces the central bank to raise rates again.

Copyright The Financial Times Limited 2017. All rights reserved.
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