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Rand Sinks to New Lows as South Africa's Credit Rated 'Junk'

Rand Sinks to New Lows as South Africa's Credit Rated 'Junk'
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Tuesday, 04 April 2017 09:39 AM

The South African rand currency plunged to yet another new low as credit ratings agency Standard and Poor's downgraded the nation's rating to "junk" status, as pressure on President Jacob Zuma grows following a controversial cabinet shuffle.

S&P said the cut to below investment grade reflects "heightened political and institutional uncertainties" following Zuma's shock purge of critical ministers on Friday, including respected finance minister Pravin Gordhan.

The shake-up has "put at risk fiscal and growth outcomes," the ratings agency added as it downgraded South Africa to BB+ from BBB-.

South Africa's rand was recently at 13.76 per dollar, from 13.6719 per dollar at 4:55 p.m. Monday in New York. The rand has traded as low as 13.9450 to the dollar, the weakest level since January 11. 

But when currency volatility hits South Africa, it tends to yield “spectacular results,” Simon Derrick, a currency specialist at BNY Mellon, told the Financial Times.

The rand’s plunge is “an almost perfect example of what happens when a carry trade target currency collapses,” he told the FT.

“The rand has proved to be attractive for investors pursuing a carry trade strategy in which they borrow a currency with a low interest rate to fund the purchase of currencies with high rates,” the FT explained.

Meanwhile, the increased likelihood of further credit downgrades by Moody's and Fitch also is set to put pressure on the rand this week, analysts told Reuters.

"Any chance of avoiding this result evaporated last week when President Jacob Zuma sacked his respected finance minister," John Ashbourne, an analyst at Capital Economics, said in a note. "Officials from several agencies had stressed the need to maintain the current team at the treasury."

Moody's ratings agency said it was placing its own South Africa rating -- two notches above "junk" status -- on review for a downgrade, a decision it said was "prompted by the abrupt change in leadership of key government institutions."

Mmusi Maimane, leader of the main opposition Democratic Alliance, branded the S&P downgrade "a clear vote of no confidence in President Zuma."

The president has faced widespread criticism for replacing Gordhan with a loyalist, former home affairs minister Malusi Gigaba.

All of South Africa's main opposition parties have condemned the move, as has deputy president Cyril Ramaphosa, an ANC member, and the communist partners in the ANC's coalition government.

Opposition parties on Monday vowed to press ahead with a no-confidence vote against Zuma, as the ANC's own integrity commission delivered a stinging rebuke over the cabinet shuffle, saying it was "deeply perturbed" by the lack of consultation, according to media reports.

Shortly after his appointment, Gigaba had stressed the need to maintain South Africa's investment grade status.

The treasury issued a statement in response to the S&P downgrade saying it showed the need to "accelerate inclusive growth and development."

"Reducing reliance on foreign savings to fund investment and relying less on debt to finance public expenditure will secure South Africa's fiscal sovereignty and economic independence," it added.

The country was granted a reprieve at the end of last year when rating agencies did not drop it to the "junk" category following a series of downgrades.

Zuma has survived several no-confidence votes in recent years.

But "when other motions of no confidence failed, we were not facing the crisis that we are facing currently," said the president of the African Christian Democratic Party, Kenneth Meshoe.

"Now it is not only members of the opposition that acknowledge that we have a crisis, but members of the ruling party," he told AFP.

"This is not an academic exercise, we are serious about this," said Maimane. "We are working to remove Jacob Zuma."

With 249 seats, the ANC commands a strong majority in the 400-member parliament. For a no-confidence vote to pass, the opposition would have to secure a simple majority -- meaning at least 50 votes from ANC lawmakers.

Analysts say the no-confidence vote is unlikely to pass.

"I don't see the ANC caucus splitting ranks -- that will be quite a momentous day. It would also give far too much prominence to the opposition, which I don't think even those who dislike Zuma would want to do," said Daniel Silke, an independent analyst.

But Zuma's cabinet overhaul exposed deep divisions within the ANC, and DA officials are confident they can recruit enough support from ruling-party MPs to unseat the president.

"There are quite a number of other colleagues and comrades who are unhappy about this situation, particularly the removal of the minister of finance who was serving the country with absolute distinction," Ramaphosa, the ANC deputy president, said after the reshuffle.

(Newsmax wires services Reuters, Bloomberg and AFP contributed to this report).

© AFP 2019

   
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The South African rand currency plunged to yet another new low as credit ratings agency Standard and Poor's downgraded the nation's rating to "junk" status, as pressure on President Jacob Zuma grows following a controversial cabinet shuffle.S&P said the cut to below...
rand, south africa, credit, rating, junk, S&P
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2017-39-04
Tuesday, 04 April 2017 09:39 AM
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