Ramaphosa crisis: Bond yields weaken most since 2015

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President Cyril Ramaphosa         Photo by GCIS
President Cyril Ramaphosa Photo by GCIS

Five years ago, Cyril Ramaphosa’s ascent to power fuelled a euphoric rally in South Africa’s assets that coined a new word: Ramaphoria. On Thursday, a financial scandal threatened to end it all in a rout.

The nation’s currency tumbled toward its worst decline in six years and the government’s borrowing costs surged the most since 2015 as the president considered resigning over potential breaches of the constitution related to the theft of $580 000 (R10.2 million) stashed at a game farm he owns. Options traders bet on the wildest currency volatility in two years, and the cost to hedge against a sovereign default jumped the most in the same period. 

The reversal marks a stark contrast to the market reaction between November 2017 and February 2018 when Ramaphosa emerged as the replacement for the scandal-ridden tenure of Jacob Zuma.

His reform agenda and clean image helped fuel a 27% rally in the rand in that period.Money managers now say he failed to deliver the policy changes required to ignite growth in the country, considered a bellwether for emerging markets. Rampant unemployment at about 33% and a continued mess in the electricity sector have lowered markets’ confidence in him, with the latest political crisis pushing them over the edge.

"The market dreads political instability and often prefers to go with the devil they know than the devil they don’t," said Cristian Maggio, the head of portfolio and ESG Strategy at TD Securities in London.

"But Ramaphosa’s reform agenda has been underwhelming to say the least. Doubts will remain as to whether another candidate can kick-start that process, but we surely know that Ramaphosa is unlikely to deliver what is needed." The leadership crisis sent the rand as much as 4.2% lower to 17.9596 per dollar, at one point set for the biggest one-day loss since November 2016. The currency trimmed some of those losses to end the session down 2.6% to a three-week low at 17.6574.

Some more market reaction:

The 10-year sovereign rand-bond yield rose as much as 84 basis points to 11.64%.The 10-year dollar-bond yield climbed 51 basis points to 7.46%.

One-week implied volatility on the currency, based on options prices, soared 5 percentage points to almost 21%.Credit default swaps, used to hedge against the risk of default by South Africa in the next five years, increased 30 basis points to 274.

An index of bank shares slumped as much as 7.7%, the most since May 2020.

“The probability of Ramaphosa lasting another full term looks very low to me now,” said Kieran Curtis, director of investment at abrdn in London.

The rand's one-week implied volatility is at its highest since November 2020.

South Africa’s currency is no stranger to routs triggered by political drama. It dropped as much as 5.2% on December 9, 2015 when President Zuma fired the then Finance Minister Nhlanhla Nene and replaced him with a little-known lawmaker. The rand plunged 9.2% in five days through April 3, 2017 as Zuma dumped another finance minister, Pravin Gordhan.

Thursday’s losses in South Africa came amid gains in global stocks, bonds and currencies after Federal Reserve Chair Jerome Powell signaled the central bank may slow the pace of monetary tightening and a Chinese official in charge of pandemic controls indicated strict rules may be relaxed.

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