UPDATE: The local currency is taking a beating, losing almost 2% to trade dangerously close to R13.70 to the US dollar. By 10:50 the rand was trading at R13.68/$.
Political analyst Daniel Silke and many other commentators warn that the worst is still to come. Silke in his review of Malusi Gigaba's first 24 hours as new Finance Minister refers to a particularly embarrassing tweet on Friday for any South African to read from the highly influential Ian Bremmer, president and founder of the Eurasia Group – a political risk and consulting firm based in New York said: “Zuma is as politically shrewd as they come. And as economically illiterate. Things are not looking good for South Africa”.
Silke points out Gigaba’s disregard for what a downgrade will do to the cost of capital and ability to spend on crucial infrastructure and social services, and highlights his spurning of the global financial system prevalent in some ANC quarters.
Cape Town – The rand weakened sharply by more than 1% on Monday morning as an analyst warned traders to prepare themselves for “big moves up and down”.
The warning by Umkhulu Consulting analyst Adam Phillips on Monday came as economic uncertainty intensified following the removal of finance minister Pravin Gordhan and deputy minister Mcebisi Jonas from their posts last Thursday.
Policy uncertainty, the risk of a ratings downgrade and a possible vote of no confidence in President Jacob Zuma is keeping markets uncertain.
By 09:45 on Monday, the rand had dropped by 1.26% to trade at R13.57 against the greenback.
South Africa could be downgraded to junk status as soon as Monday by Standard & Poor's, who reportedly had an emergency meeting at the weekend, according to Business Day.
While there is uncertainty, Rand Merchant Bank analyst John Cairns believes foreign investors “are not panicking”.
“They bought another R2bn of bonds on Friday, taking the total for the week to R12bn,” he wrote in a note on Monday.
“The tide of cash flooding emerging markets is such that it is lifting even half-submerged boats,” he said. “Foreign flows remain one of the key indicators we are watching to see if the market response can remain sanguine.”
Investor have “oddly” been buying local bonds as a sign of profit-taking and optimism that maybe things won’t be as bad as predicted, TreasuryOne dealer Phillip Pearce explained in a note on Monday.
“International investors are still yield-hungry and are willing to take on additional risk to get it, but their risk appetite will need to be tempered with caution as most of the market fell into the lull of ignoring the political risk that needed to be priced into the rand,” he said.
GRAPH: Rand vs dollar currency on Monday