Mixed denomination rand currency banknotes are arranged for a photograph at a First National Bank branch in Johannesburg. The rand weakened to a new record low yesterday, slumping more than 3% in a sell-off by investors after the dismissal of the finance minister, while banks led stocks lower.
Reuters
Johannesburg
South Africa’s rand weakened to a new record low yesterday, slumping more than 3% in a sell-off by investors after this week’s dismissal of the finance minister, while banks led stocks lower.
President Jacob Zuma sacked Nhlanhla Nene late on Wednesday in favour of a relatively unknown lawmaker David van Rooyen, unnerving investors in an ailing economy whose ‘investment grade’ status is already at risk.
The sacking of Nene, a veteran civil servant in the ministry who was keen to rein in government spending in Africa’s most industrialised economy, has also sparked a sell-off in banks, which have dropped nearly 20% over since Thursday.
Many economists have questioned van Rooyen’s ability to steady an economy being hammered by the collapse in prices of commodity exports that range from coal to gold, and raised concerns that public spending could spiral out of control.
“Markets don’t like uncertainty,” Cratos Capital equity analyst Greg Davies. “You have taken a minister that had a lot of credibility with the market. You have taken him away without giving any explanation and put someone in his place that doesn’t seem to have any sort of experience like the previous minister.”
By 1300 GMT the rand was 2.58% lower against the dollar at 15.8900, edging back to the psychologically crucial 16 level after a brief recovery.
The central bank told Reuters it would hold its monetary policy committee meeting in January as scheduled.
Analysts had speculated that the bank may call an earlier meeting to increase interest rates to protect the rand.
The bank raised the benchmark lending rate for the second time in 2015 last month to 6.25%.
Yields on local and dollar denominated debt soared as the likelihood of a downgrade to junk spooked investors. Demand levels in local bond auctions were weak on the day, reflecting the subdued interest in local debt.
On the bourse, the banking index dropped more than 10% in early deals before recouping some of the losses to trade 7.3% lower as worries grew that South Africa sovereign credit rating would hit profits and drive bad debts among the nation’s banks.
Barclays Africa plummeted as much as 12%, but later traded 4.6% lower at 125.71 rand, while FirstRand as lost 8.7% to 35.42 rand and Standard Bank fell 6% to 99.55 rand by 1340 GMT.
Credit ratings agency Fitch downgraded South Africa last Friday, leaving the continent’s most sophisticated economy just one notch above “junk” status, and said on Thursday Nene’s firing “raised more negative than positive questions”.
A downgrade would jack up South Africa’s borrowing costs, which would flow through to the banking system. The blue-chip JSE Top-40 index dropped 1.3% to 43,636, while the broader All-share index was off 1.66% at 48,171 points.
The yield on the benchmark government bond due in 2026 has added nearly 200 basis points, or 2%, in the last two days to levels last seen during the 2009 recession.
Overseas investors also shunned the country’s dollar-denominated debt, with the average yield premium to hold South African debt compared to US Treasuries surging to 6-1/2 year highs.
“If you were going to design a terrible period to fire a minister, this is the perfect time. It is a real tragedy,” said Graeme Korner, fund manager from Korner Perspective.
