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- News that President Cyril Ramaphosa could be impeached saw
the rand and local equities crash this week. - Some analysts warn the rand’s weakening could extend if
there is less clarity on Ramaphosa’s future. - So far this year, the rand has lost 9% against the dollar.
- For more financial news, go to the News24 Business front page.
The scandal threatening the future of Cyril Ramaphosa’s
presidency rattled South Africa’s financial markets this week and the
instability risks inflicting more damage still on the country’s currency and
bonds.
There’s no obvious long-term successor to lead the country
if the crisis ends up costing the president his job, so it’s unclear what would
happen to his reform agenda, which is aimed at kick-starting start one of
Africa’s largest economies. That, investors say, is a recipe for more outsized
swings in the rand, which saw its implied volatility this week soar to a level
last seen in 2020 when the global economy was reeling from the onset of the
Covid pandemic.
“The immediate focus remains on whether the president
resigns or fights on,” said Matete Thulare, the Johannesburg-based head of
foreign-exchange execution at Rand Merchant Bank in a note to clients. “Rightly
or wrongly, if he goes, voluntarily or otherwise, the rand will run again.”
READ | Ramaphosa resignation would create chaos, says
Mantashe
When news broke that Ramaphosa could face impeachment due to
a potential constitutional breach, traders responded by taking an axe to the
currency and pushing the country’s borrowing costs up by the most since 2015.
The cost of insuring the debt against default jumped and South African bank
stocks posted the worst one-day loss in more than two-and-a-half years.
The rand enjoyed a bit of respite on Friday, paring some of
its weekly decline after Finance Minister Enoch Godongwana said there was just
a 10% chance of Ramaphosa leaving office. African National Congress (ANC) officials
are expected to continue discussing the matter over the weekend, with investors
eager for any updates.
The nation’s currency, which is often seen as a proxy for
risk appetite in emerging markets, has lost about 9% against the dollar so far
this year. The rand closed Friday at 17.5052 per dollar, and the yield on
10-year sovereign local bonds was at 11.3%.
“It’s a very fluid situation, and anything can happen
still,” said Brad Bechtel, a New York-based currency strategist at
Jefferies. “Even if he does resign, it won’t change the broader backdrop
in South Africa, which still has some challenge ahead of it.”
READ | Carol Paton | Ramaphosa: It’s not over until it’s
over
For Wells Fargo Securities strategist Brendan McKenna, the
president’s resignation could leave a gap in leadership that would stoke
political risk and drag the nation’s assets lower. But even a decision to stay
could call the ANC’s strength into question and lead to longer-term market
pain, he warned.
The scandal risks hurting the party’s credibility, as
Ramaphosa was once touted as a figure of anti-corruption, helping the rand to
leap 27% between November 2017 and February 2018. He’s since struggled to
deliver on his reform agenda or ignite economic growth, with the country’s
jobless rate among the world’s worst and major challenges stemming from the
electricity sector.
Goldman Sachs Group Inc. analysts also warned that the rand’s
recent weakening could extend even further if clarity remains elusive for
protracted period. “A prolonged process might imply further downside FX
risk,” economists Andrew Matheny and Bojosi Morule said in a note.
-With assistance from Leda Alvim.
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