Cape Town - Rand weakness amid a massive Cabinet reshuffle in which Finance Minister Pravin Gordhan and his deputy Mcebisi Jonas have been casualties has so far been constrained, but there are still risks for far bigger losses.
RMB currency strategist John Cairns said the important thing to note is that foreign investors have not yet panicked, "but they too might have been too complacent", that Gordhan won't get fired.
"Rand weakness in this entire episode has been far more constrained than we thought likely. We’ve argued that this might have been because the market did not believe that Gordhan would go," he said.
President Jacob Zuma announced in a midnight statement that he has replaced the Treasury pair with Home Affairs Minister Malusi Gigaba and ANC MP Sfiso Buthelezi. The rand plummeted, first touching R13.45 when the news of Gordhan’s axing broke and then pushing to R13.60 in early morning trade.
By 10:10 the rand was trading at R13.48 to the greenback.
Cairns said the risks remain solidly to the upside.
He lists seven things market watchers are keeping a keen eye on:
1) Whether Zuma reverses his decision as he did after Nenegate. The presumption must be that this is extremely unlikely: he surely prepared much better this time around and would not have acted unless he was confident he would not have to reverse his decision.
2) Whether the backlash within the ANC and broader society forces Zuma out of office. This also looks unlikely. Zuma has the backing of most members of the ANC’s National Executive Committee, which has the power to recall him. Parliament could pass a no confidence motion, which we understand requires 50%+1 of the vote, but this would require a revolt within and so a break-up of the ANC, which is probably a step too far.
It is not clear when the no confidence motion will be voted on: the Economic Freedom Fighters has requested this to happen between April 7 and 9, but the call sits with the House speaker. Protests on the street are highly likely, but don’t mean much unless they get the NEC or Parliament to act.
3) How rating agencies respond. We think it is very likely that all the agencies will downgrade the sovereign credit rating by one notch each. This means that the foreign currency credit rating from S&P and Fitch will fall to BB+, while it will sit at the edge of investment grade at Moody’s, Baa3.
We think all three rating agencies will retain their negative outlooks. Moody’s action will occur as per schedule on April 7. Fitch is not bound by a timeline so it can also act quickly. It is not certain but S&P might bring forward its review to the coming weeks, ahead of the scheduled June 2 deadline.
4) How foreign investors (as tracked in the daily flows data from the JSE) respond. A key reason why the markets have held up so well over the past week is that local political problems have come against an extremely favourable global backdrop - foreigners have been aggressively buying into all emerging markets.
Foreign flows will indicate which of these two forces - the local negative or the global positive - will dominate going forward. Flows have been remarkably strong so far this week but this might have reflected disbelief that Gordhan would go rather than the view that global issues dominate, and we suspect flows will turn negative today.
5) Comments or actions from the new finance minister - remember Des van Rooyen made some outrageous statements when he was appointed. New Finance Minister Malusi Gigaba is likely to be circumspect: although in the Zuma camp, he is generally respected for his activities in previous roles.
6) Resignations from the Cabinet. Ministers from the South African Communist Party will surely feel they need to go. The bigger question is whether Deputy President Cyril Ramaphosa also goes. The more people who leave, the more pressure will build on Zuma.
7) Any indications from within ANC structures on how the president’s actions will influence how the elective conference will play out in December.