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South African Rand Stable Three-Weeks After Political Reshuffle

On April 3rd, ratings agency Standard & Poor’s downgraded South Africa’s sovereign credit rating to “junk” status (to BB+ from BBB-) following a chaotic and unwelcome cabinet reshuffle in the country during the final days of March.

As reported earlier in April on BestExchangeRates.com, South African president Jacob Zuma had sacked his well-respected finance minister, Pravin Gordhan, in an overnight cabinet purge and replaced him with Malusi Gigaba – a man seemingly without business experience and no economic background.

A downgrade by Fitch followed several days later, who said that “recent political events would weaken standards of governance and public finances.”

Markets were equally unimpressed with President Zuma’s decisions and the South African rand was hammered as a result. The rand fell more than 8% against the US dollar in the days that followed S&P’s downgrade, adding to losses that were already in play following rumours of Gordhan’s upcoming dismissal, which began as early as March-27th. Prior to the rumours, the rand had been one of 2017’s best performing currencies.

Overall, the rand fell by 12% against the US dollar in the seven trading days between March 27th and April 4th, from 0.0813 (USD/ZAR 12.307) to 0.0717 (USD/ZAR 13.942).

 

Renewed Stability in the Rand Surprises Investors

“Once upon a time, the sovereign credit downgrade of an emerging market powerhouse would be enough to send global markets into spasms of selling”, said Dwan Kissi of CNBC this week.

But not anymore, or so it seems.

The adjustment to the investment grade of South Africa has produced remarkably little spillover into other emerging market currencies. Each of the Mexican peso, Indian rupee, Philippine peso, Thai Baht, Brazilian real and Russian ruble have strengthened or traded sideways against the US dollar in recent weeks.

Even more positive are the most recent moves in the rand itself. Since USD/ZAR reached just shy of the 14.0 handle on April 4th and April 10th, the pair has fallen (the rand has strengthened) to sub-13.50 prices. In other words, in recent days the rand has clawed back around 40% of the aforementioned losses. As of writing (04:19 GMT, April-18), the USD/ZAR exchange rate is at 13.33.

One man who has not been surprised by the containment of South Africa’s political and economic problems is James Barrineau, Head of Emerging Market Debt at Schroders. Barrineau believes that financial markets had already priced in ratings downgrades for South Africa. “Much of this was anticipated by the markets”, said Barrineau. “This is a very South Africa-specific story”, he added.

 

The Future for South African Currency Stability

Dutch bank ABN Amro are one of the groups predicting strength in the rand towards the end of 2017 and into 2018.

“We expect a recovery [in the rand] next year because of higher commodity prices and our expectations for a weaker USD”, said ABN’s Arjen van Dijkhuizen this week.

However, Dijkhuizen also describes the inherent danger of investing in emerging market currencies.

“In 2017, the South African rand was the strongest performing currency. Since late-March the rand has given up [all of 2017’s] gains and is now among the weakest emerging market currencies. This behaviour shows its main vulnerability. It may rally strongly, but investors could change their minds abruptly and sell it off aggressively.”

Investors should also note that political risk in South Africa will likely remain at elevated levels for the foreseeable future – at least until general elections are held in 2019.

In what will be difficult times for South Africa – the country is battling severe droughts, power shortages, labour strikes, political uncertainty and now, following the downgrade to its rating, more costly financing of its current account deficit – investors will be looking for signs of fiscal discipline and for the South African Reserve Bank to maintain institutional credibility.

BestExchangeRates readers in need of South African currency can easily find the cheapest providers by using our comparison calculators for ZAR currency transfers and ZAR travel money.

 
Please note that the opinions of our authors are their own and do not reflect the opinion of Best Exchange Rates and should not be taken as a reference to buy or sell any financial product.